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Insurance Turning “Green” in California: Lawmakers Propose Tax Credit for Insurers Who Invest in “Green” Tech Projects

Thu, 02 Sep 2010 10:55:24 GMT

California legislators are ready to pass a bill to entice insurance companies to invest in "green" technology projects in low- and moderate-income urban and rural communities.

The bill – “AB 1011” – would authorize insurers to claim a tax credit against the gross premiums tax equal to 20% percent of qualified investments that emphasize clean energy projects, energy efficiency improvements, environmental technology projects and other investments that conserve natural resources or reduce green house gas emissions. For a complete copy of the current proposed bill, click here.

AB 1011 would make findings and declarations concerning California's role in greenhouse gas emission reduction, and would include green investments, as defined, as “community development investments.” The bill requires the California Insurance Commissioner – on the Insurance Department's website – to biennially identify those insurers that make investments that qualify as green investments as well as the cumulative amount of identified insurer investments in green investments.

"By increasing incentives for reduced driving, the building of 'green buildings,' investments in energy efficiency improvements and renewable energy projects, and the conservation of natural resources, the insurance industry can help reduce greenhouse gas emissions," according to the text of the bill.

AB 1011 would add environmentally friendly investments to a list of allowed projects under the California Organized Investment Network (“COIN”) program. COIN is a collaboration between insurance regulators, the insurance industry, community affordable housing and economic development organizations and others. COIN was established in 1996 as an industry-preferred voluntary substitute to state legislation that would have required insurance companies to invest in under-served communities, similar to the federal Community Reinvestment Act that applies to the banking industry, according to the California Department of Insurance.

Initially, apprehension about creating a revenue shortfall dimmed prospects for passing AB 1011, but negotiators worked out a solution, said Assemblyman Dave Jones, D-Sacramento.

The Association of California Insurance Companies, an affiliate of the Property Casualty Insurers Association of America (PCI) which represents more than 300 property/casualty insurance companies doing business in California, says it supports the bill. The American Insurance Association and the Association of California Insurance Companies had early concerns about the legislation when it appeared to be mandatory on insurers, but currently have no objections to a purely voluntary program with tax incentives.

AB 1011 should clear final legislative hurdles and be sent to Gov. Arnold Schwarzenegger before the end of the legislative session on August 31, 2010, according to Assemblyman Jones.

Deepwater Horizon Incident: Lost Income and Lost Profits Claims Paid By BP

Thu, 02 Sep 2010 10:43:30 GMT

A press release issued by BP states that it has made claim payments of nearly $400 million during the 16 weeks it managed claims related to the Deepwater Horizon Incident. A copy of the press release and its exhibits can be found here.

The exhibits to BP's press release indicate that 93% ($370.15 million) of the nearly $400 million paid relate to claimants' lost income/lost profits. Accordingly, insurers might want to confirm with their insureds that are making claims related to the BP spill under policies that potentially respond to claims of lost income, lost profits or business interruption any amounts that the insured has received or may receive from BP. If an insured has not submitted a claim to BP for damages that may also be covered under a policy of insurance, an insurer may want to further explore its legal options with respect to encouraging the insured to directly submit a claim to BP, or the insurer's ability to submit a claim on behalf of the insured.

The Dodd-Frank Act: The U.S. Government Turns its Attention to Insurance Regulation

Thu, 02 Sep 2010 10:41:00 GMT

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) is the latest development in the ongoing saga of state versus federal regulation of insurance. Unlike other major industries, insurance is still primarily and almost exclusively regulated by the states - and the states have long been vigilant about keeping it that way. There is no insurance equivalent of a national bank, and an insurer seeking to do business in all 50 states and the District of Columbia must apply for and obtain 51 separate licenses, and thereafter comply with myriad specific laws and regulations of each of those 51 jurisdictions. Critics of state regulation include foreign insurers, who see it as a trade barrier, large commercial insurance buyers, who see it as a complicating and unnecessary cost factor in their risk management programs, and insurers who must maintain robust compliance departments and budgets. On the other hand, proponents of state regulation can point to relatively few insurance company insolvencies on a historic basis, a well-functioning insurance delivery system, and meaningful consumer protection. To read more, please click on the link to the full article published by Bloomberg Law Reports.

Second Circuit Finds that Class Arbitration Waiver Clause Is Unconscionable, Refuses to Compel Arbitration

Wed, 01 Sep 2010 13:24:55 GMT

In Fensterstock v. Education Finance Partners and Affiliated Computer Services, Inc., plaintiff Fensterstock commenced a class action lawsuit in the Southern District of New York against Education Finance Partners and Affiliated Computer Services for engaging in fraudulent and deceptive practices in connection with the issuance of student loans. The defendant lenders moved to stay the action and compel individual arbitration in accordance with the loan agreement’s binding arbitration clause. The agreement was governed by California law and the arbitration clause mandated that at the request of any party, disputes would be settled by binding arbitration and on an individual basis only. The clause therefore precluded the possibility of Festerstock’s class action suit either in litigation or arbitration.

Fensterstock opposed the motion to compel arbitration on the grounds that the arbitration clause was unconscionable under California law because it constituted a contract of adhesion and was thus void as against public policy. Applying California law, the District Court held that although the Federal Arbitration Act (“FAA”) requires a court to stay a proceeding pending the outcome of an arbitration between the parties, the requirement does not apply where the arbitration clause itself is unconscionable. The court held that the class-action waiver made the arbitration clause unconscionable and denied the defendant’s motion to compel.

During oral argument before the Second Circuit, counsel for the defendants argued that if the court determined that the class-based waiver clause was unenforceable, the agreement’s severability provision allowed the court to enforce the remainder of the arbitration provision absent that clause. The Second Circuit held that the class-action waiver provision was unenforceable and addressed whether it could still compel arbitration in accordance with the remainder of the arbitration provision. The defendants’ oral argument, as cited by the court, did not specify whether they sought to compel individual or class-based arbitration, but the Second Circuit proceeded to address the issue as a request to compel the latter. Relying upon the Supreme Court’s recent decision in Stolt-Nielsen S.A. et al. v. AnimalFeeds International Corp., No. 08-1198 (Apr. 27, 2010), which held that the FAA did not authorize a court to compel class-based arbitration absent an express provision in the contract allowing this procedure, the Second Circuit held that simply striking a clause that prohibited class-based arbitration did not permit the court to otherwise compel arbitration. The court, having struck the class-based waiver clause, was left with an arbitration agreement that was silent as to the possibility of class-based arbitration. Accordingly, in the absence of an express agreement to arbitrate on a class-action basis, the court had no authority under Stolt-Nielsen to compel arbitration, and the motion to stay the court proceedings was denied.

Click here to review a copy of the Second Circuit’s decision, captioned Fensterstock v. Education Finance Services, No. 09-1562-cv (2d Cir. July 12, 2010).

Fourth Circuit Rules that Panel Did Not Exceed the Scope of Its Powers and Declines to Opine Whether Manifest Disregard of the Law is Available After Hall Street

Wed, 01 Sep 2010 13:17:17 GMT

In a recent decision by the Fourth Circuit Court of Appeals, MCI Constructors, LLC v. City of Greensboro, No. 09-1600 (4th Cir. July 1, 2010), the court held that the district court did not err in denying motions to vacate certain arbitration awards.

The appeal arose from a contract dispute between the City of Greensboro, North Carolina (the “City”) and MCI Constructors, LLC (“MCI”) relating to the construction of a wastewater treatment plant. National Union Fire Insurance Company (“National Union”) provided a performance bond to MCI.

After an arbitration bifurcated into liability and damages phases, the arbitration panel found that the City was entitled to recover $14,939,004 from MCI. The City moved to have the liability and damages awards confirmed by the district court, and MCI and National Union moved to vacate. The district court granted the City’s motion and entered an order confirming the arbitration awards. On appeal, MCI and National Union argued that vacatur was warranted because the liability award was “obtained through undue means,” and that the damages award did not “draw its essence from the parties’ contract” and was the product of the panel having exceeded its powers.

The Fourth Circuit affirmed, finding that there was no evidence that the arbitration panel’s determination involved “undue means.” The court also ruled that the panel did not exceed its powers in issuing the damages award, noting that as long as arbitrators are even arguably construing or applying a contract, an award should not be disturbed. Finally, the court disagreed with MCI and National Union that the damages award must be vacated because the panel allegedly disregarded unambiguous provisions of the contract at issue and failed to provide a reasoned basis for its decision. The court stated it was possible to square certain articles of the contract with the panel’s awards, and that the panel was not required to discuss the basis for its decision. Because it found that MCI and National Union’s arguments did not entitle them to relief, the court stated that it need not decide whether courts may still vacate an award that is the result of manifest disregard of the law, or if that doctrine exists after the U.S. Supreme Court’s decision in Hall Street v. Mattel Inc.

Click here and here to review prior blog posts discussing the viability of manifest disregard of the law post-Hall Street. A copy of the Fourth Circuit’s decision can be found here.

Second Circuit Finds that Reinsurer’s Fraud Claims Are Not Arbitrable, but Reverses District Court’s Judgment and Holds that those Claims Are Time-Barred, Relieving Cedents of Liability

Wed, 01 Sep 2010 13:04:02 GMT

Defendants, certain ceding companies, appealed a judgment from the U.S. District Court for the Southern District of New York holding them liable for fraudulently inducing the plaintiff reinsurer to enter into two reinsurance facilities. The defendants also appealed the portion of the judgment finding (a) that the cedents waived their right to arbitration by pursuing it in a summary judgment motion instead of at the outset of the dispute and (b) that the reinsurer’s claims sounded in fraud (as opposed to contract) and were thus not arbitrable under a provision in a facultative reinsurance agreement providing for arbitration of disputes “arising out of the interpretation of this agreement.” Click here to review a complete blog post about the district court’s decision.

The U.S. Court of Appeals for the Second Circuit affirmed the district court’s finding that the reinsurer’s claims sounded in fraud, and thus held that those claims were not arbitrable under the relevant arbitration agreement (but declined to address the waiver issue, noting its ruling made the issue moot). However, the Second Circuit reversed the portion of the judgment holding the ceding companies liable for the fraudulent inducement claims, finding them to be time-barred by the statute of limitations.

Under New York law, a claim for fraud must be commenced either within six years from the commission of the fraud or within two years from the date the fraud was discovered, or could have reasonably been discovered, whichever is later. The jury had found that the reinsurer could not have reasonably discovered the fraud until after December 2, 2003, which was less than two years from the date the reinsurer filed suit. The Second Circuit disagreed with this finding, noting that the reinsurer was on notice before December 2, 2003 of the alleged misrepresentations (i.e., that the facilities would operate on a facultative obligatory basis, instead of as purely facultative contracts which allowed the ceding companies to pass off bad risks). The Second Circuit found that this evidence triggered the reinsurer’s duty of inquiry, and imputed to it knowledge of the alleged fraud. As such, the court held that the fraudulent claims were time-barred.

Click here to review a copy of the Second Circuit’s opinion, entitled AXA Versicherung AG v. New Hampshire Ins. Co., et al., No. 08-cv-2521 (Aug. 23, 2010).

California Legislature Passes Significant Surplus Lines Reforms

Wed, 01 Sep 2010 09:58:45 GMT

On August 19, 2010, the California Legislature passed two bills, AB 1708 and AB 1837, which if signed into law by Governor Arnold Schwarzenegger will have a significant impact on surplus lines insurers.

AB 1708 would raise California’s minimum capital and surplus requirements for surplus lines insurers from $15,000,000 to $45,000,000. This would place California on par with New York’s minimum capital and surplus requirements; currently the only other state requiring at least $45,000,000 for eligibility. Under the new requirements, at least $25,000,000 of the capital and surplus would need to consist of cash, readily marketable securities and certain other eligible investments. Surplus lines insurers who are already eligible but do not meet the minimum requirements would have until January 1, 2011 to increase their capital and surplus to at least $30,000,000, and until December 31, 2013 to increase their capital and surplus to $45,000,000. The bill also increases the minimum capital and surplus requirements for insurance exchanges.

AB 1837 would allow for greater flexibility in the management and operations of California domestic insurers and their affiliated surplus lines insurers. Currently, California strictly prohibits an eligible surplus lines insurer from conducting any business within the state. AB 1837 would permit an affiliated California domestic insurer to perform certain administrative services including: computer operations unrelated to underwriting; clerical and administrative staffing support provided the staff have no contact with the surplus lines insurer’s policyholders; human resources functions provided all decisions are made directly by the surplus lines insurer; claims adjusting provided all decisions are made directly by the surplus lines insurer; and investment management provided that certain decisions are made by the surplus lines insurer. The bill would also allow for the surplus lines insurer to have common directors with the California domestic insurer as long as the common directors do not constitute a majority of the voting authority of the surplus lines insurer and perform all management functions for the surplus lines insurer outside of California.

The bills were enrolled and sent to Governor Schwarzenegger August 26, 2010. The Governor has until September 30th to either enact or veto the bills.

Click here to view AB 1708.

Click here to view AB 1837.

Court Finds Coverage Excluded For Shooting By Security Guard

Wed, 01 Sep 2010 08:50:10 GMT

A California Appeals Court recently held that a wrongful death action against a security guard who shot a man while on duty was excluded under an “assault and battery” exclusion, even if the security guard acted in self-defense. Michael Krause, Sr., et al. v. Western Heritage Ins. Co., No. G041405 (Cal. App. 4th Dist. Aug. 2, 2010) (unpublished).

The security guard, while on patrol, shot and killed the driver of a pickup truck. According to the driver’s estate, the driver was on the premises to visit a girl he had met and acted innocently. According to the security guard, the driver acted menacingly, striking the guard twice with the vehicle. The security guard claimed he shot the driver in self defense, as the truck was once again accelerating toward him. The victim’s estate sued the security guard and his company for negligence.

The security company’s insurance policy excluded coverage for “‘bodily injury’ expected or intended from the standpoint of the insured,” but this exclusion did not apply to “‘bodily injury’ resulting from the use of reasonable force to protect persons or property.” The policy, by endorsement, also contained an exclusion for “‘bodily injury’ … arising out of assault or battery or act or omission in connection with the prevention or suppression of such acts . . . .”

The court first rejected the insured’s contention that the “assault and battery” exclusion conflicted with the carveback for “reasonable force,” creating an ambiguity. The court noted that the endorsement clearly stated that it changed the terms of the policy, meaning that it could have excluded coverage initially left intact under the main policy form. The court then held that the “assault and battery” exclusion applied. It was “clear,” said the court, that the security guard “purposefully” fired his weapon. Therefore, if his “self defense” were found “unreasonable,” the shooting necessarily would constitute assault and/or battery under California law. “Reasonable self defense,” meanwhile, could not result in coverage because a defense verdict would result and there would be no liability. Therefore, there was no potential for indemnification and no duty to defend.

Connecticut Insurance Department Issues New Data Breach Notification Requirements

Tue, 31 Aug 2010 14:53:51 GMT

The Connecticut Insurance Department (“Department”) issued Bulletin IC-25 (the “Bulletin”), dated August 18, 2010, to require all entities doing business in Connecticut that are licensed by or registered with the Department to notify the Department of any information security incident.

Who Must Provide Notice

All licensees and registrants of the Department must provide notice, including insurance producers, public adjusters, bail bond agents, appraisers, certified insurance consultants casualty claim adjusters, property and casualty insurers, life and health insurers, health care centers, fraternal benefit societies, captive insurers, utilization review companies, risk retention groups, surplus line companies, life settlement companies, preferred provider networks, pharmacy benefit managers and medical discount plans.

When and How Notice Must Be Provided

Licensees and registrants must notify the Department of any information security incident affecting any Connecticut resident as soon as the incident is identified, but no later than five calendar days after the incident is identified. Notification must be sent to the Insurance Commissioner in writing via first class mail, overnight delivery service or electronic mail.

Definition of Information Security Incident

The Department considers an information security incident to be any unauthorized acquisition or transfer of, or access to, personal health, financial, or personal information, whether or not encrypted, of a Connecticut insured, member, subscriber, policyholder or provider, in whatever form the information is collected, used or stored, that is maintained by a licensee or registrant of the Department, the loss of which could compromise or put at risk the personal, financial or physical well being of the affected individuals.

Definition of Personal Health, Financial or Personal Information

Although the Bulletin does not define personal health, financial or personal information, the Bulletin cites section 42-471 of the Connecticut General Statutes, which defines “personal information” as follows:

[I]nformation capable of being associated with a particular individual through one or more identifiers, including, but not limited to, a Social Security number, a driver’s license number, a state identification card number, an account number, a credit or debit card number, a passport number, an alien registration number or a health insurance identification number, and does not include publicly available information that is lawfully made available to the general public form federal, state or local government records or widely distributed media.

Notice Content

The Bulletin lists numerous facts that must be disclosed in the notification to the Department as is known at the time of notification, including the details about incident and remedial actions taken. Notice to the Department must also contain a draft of the notice the licensee or registrant intends to send to Connecticut residents affected by the information security incident.

Notification Regarding Vendor or Business Associate Incidents

Licensees and registrants of the Department must also report to the Department an information security incident involving a vendor or business associate of the licensee or registrant. The Department will want to be kept informed of how the licensee or registrant is managing the vendor’s/business associate’s activities.

Remedial Actions

Although credit monitoring is not required under the Bulletin or the Connecticut data breach statute, the Bulletin expresses the Department’s intention to have input into the level of credit monitoring and insurance protection offered to affected individuals, and the period of time for which remedial actions are offered.

Federal District Court Finds that Arbitrator Lacks the Authority to Issue Pre-Hearing Deposition Subpoena to Non-Party Under the Federal Arbitration Act

Tue, 31 Aug 2010 13:15:05 GMT

Helene Tomasian, a non-party to an arbitration between Ware and C.D. Peacock, Inc., moved to quash an arbitrator’s subpoena compelling her attendance at a pre-hearing deposition. See Ware v. C.D. Peacock, Inc., No. 10-cv-2587 (N.D. Ill. 2010). The subpoena was issued at the request of Peacock after the arbitrator denied its motion for summary judgment based upon “in large part” the affidavit of Ms. Tomasian.

In granting Ms. Tomasian’s motion to quash, the district court noted that the U.S. Court of Appeals for the Seventh Circuit has yet to address whether the Federal Arbitration Act (“FAA”) permits an arbitrator to subpoena pre-hearing discovery from non-parties independent of the attendance of the non-party before the arbitrator, and whether federal district courts are authorized to enforce such subpoenas under § 7 of the FAA. The court further noted that circuit courts are split on the issue, with the Second, Third, and Fourth Circuits finding that § 7 does not empower arbitrators to compel such discovery, while the Eighth Circuit has taken the opposite view.

The district court found the Second and Third Circuits’ position to be the “better reasoned view of the statute” and thus held that “the plain language of Section 7 of the FAA does not authorize arbitrators to issue subpoenas for depositions of non-parties outside the physical presence of the arbitrator.” In so holding, the court noted that Section 7 contains no discovery exception for non-party witnesses deemed to be important to an arbitration, regardless of the alleged prejudice a party seeking discovery from the non-party may face.

Click here to review a copy of the district court’s opinion.

New Jersey Issues Reminder to Surplus Lines Brokers that the $50 Limitation for Fees Charged to Originating Brokers is Still in Effect

Tue, 31 Aug 2010 09:02:40 GMT

Earlier this month, New Jersey Department of Bank and Insurance Commissioner Thomas Considine issued Bulletin No. 10-19 reminding surplus lines brokers that the $50 limitation remains in effect for fees charged by surplus lines brokers to originating brokers. P.L. 2010, Chapter 42, which was enacted on July 6, 2010, amends N.J. Stat. Ann. § 17:22A-38b to allow for the Commissioner to set the fee limitation by regulation, however, it is not effective until October 1, 2010. The Bulletin states that the New Jersey Department of Bank and Insurance will issue the new regulation prior to such date.

Click here to view Bulletin No. 10-19.

Click here to view P.L. 2010, Chapter 42.

Nevada Federal Judge Finds No Breach of Contract or Bad Faith Where Insurer Ceased Payment to Policyholders for Chiropractic Services Following Auto Accident

Mon, 30 Aug 2010 12:38:35 GMT

A Nevada federal judge has determined that an insurer did not breach its contract or act in bad faith when it terminated payment for chiropractic services for two policyholders injured in an automobile accident. The Court found that the plaintiff policyholders failed to counter medical testimony that they did not require additional chiropractic care because the “maximum medical improvement” had been reached. Gorrell v. State Farm Mutual Auto Ins. Co., Docket No. 08-cv-01757 (D. Nev. June 28, 2010).

Plaintiffs, two Wyoming residents, initially sought chiropractic treatment for neck and back injuries following an automobile accident in Las Vegas. State Farm determined that the accident exacerbated plaintiffs’ preexisting neck and back problems and agreed to pay “reasonable medical expenses” under its insurance agreement. After approximately one year, State Farm sent a letter informing Plaintiffs that it would no longer pay for their medical bills because "maximum medical improvement" had been attained. Therefore, State Farm maintained, additional chiropractic treatment was not reasonable under the insurance policy. Plaintiffs disregarded the letter and continued to receive chiropractic treatment. Plaintiffs subsequently filed suit against State Farm in Nevada state court alleging, inter alia, that State Farm's conduct constituted breach of contract and breach of the implied covenant of good faith and fair dealing.

The Court granted summary judgment to State Farm on Plaintiffs’ claim for breach of contract, and found that State Farm was not obligated to continue making payments for Plaintiffs’ treatment. The Court noted that Plaintiffs’ treating chiropractor and an independent chiropractor both agreed that Plaintiffs had already reached maximum medical improvement, before State Farm decided to stop payment; and that Plaintiffs failed to present any evidence to indicate that the chiropractors’ conclusions were inaccurate or that Plaintiffs had not in fact reached maximum medical improvement.

The Court also granted summary judgment to State Farm on Plaintiffs’ claim for breach of the implied covenant of good faith and fair dealing. Because Plaintiffs were not entitled to additional insurance coverage , the Court held, no factual dispute existed regarding whether State Farm acted in bad faith. Finally, the Court granted summary judgment to State Farm on Plaintiffs' claims for negligent misrepresentation and punitive damages, based on its finding that State Farm had complied with its obligations under the insurance contract.

Please click here to read the Order.

“Bare Averment” Insufficient to Maintain Bad Faith Claim in New Jersey for Underinsured-Motorist Benefits

Mon, 30 Aug 2010 12:31:26 GMT

A New Jersey federal judge dismissed a bad-faith claim for underinsured-motorist benefits, finding that Plaintiff's complaint lacked necessary factual support and did not rise above the level of “bare averment.” The Court also dismissed Plaintiff’s claim for punitive damages, finding that Plaintiff failed to allege sufficient facts to show egregious circumstances or that the insurer's conduct was wantonly reckless or malicious. Johnson v. Liberty Mutual Ins. Co., Docket No. 10-cv-10494 (D. N.J. June 24, 2010).

Plaintiff was initially involved in a motor vehicle accident and suffered severe and permanent injuries. She subsequently settled with the tortfeasor’s liability insurer for the policy limit of $25,000. She then tendered a claim to her insurer, Liberty Mutual Insurance Company (“Liberty Mutual”) under the underinsured motorist coverage provided by the policy. This claim proceeded to arbitration, resulting in an award of $30,000, which the Plaintiff did not accept. The plaintiff then filed suit against Liberty Mutual, alleging breach of contract, failure to act in good faith, punitive damages and attorneys’ fees.

In granting Liberty Mutual’s motion to dismiss, the Court first noted that New Jersey law recognizes two circumstances in which an insurer may exhibit bad faith with regard to an insured’s first-party claim: denial of benefits without a fairly debatable reason for doing so, and unreasonable delay in the processing of a valid claim. The court found that Plaintiff's complaint did not sufficiently indicate either of these circumstances. Plaintiff merely stated that her underinsured motorist claim had proceeded to arbitration, which she acknowledged was her choice. In the absence of any factual support, Plaintiff’s claim of bad faith was no more than a “bare averment” that she “want[ed] relief and [wa]s entitled to it.” Under Twombley and Iqbal, such conclusory statements were not entitled to be accepted as true and were not enough to survive a motion to dismiss.

With respect to Plaintiff’s punitive damages claim, the Court noted that under New Jersey law punitive damages are not generally recoverable in the context of first-party insurance claims. Rather, recovery of punitive damages requires an insured party to meet a higher standard, namely, a showing of “egregious circumstances” where the insurer’s conduct was “wantonly reckless or malicious.” Applying these standards, the court held that Plaintiff 's complaint did no more than make vague allegations that Liberty Mutual “unreasonably prolonged the matter” and “failed to act in good faith.” These allegations fell short of the factual specificity required by Twombley and Iqbal. The Court thus dismissed Plaintiff’s claim for punitive and exemplary damages.

Please click here to read the Memorandum Opinion.

Healthcare News from Capitol Hill and the Department of Health and Human Services – August 30, 2010

Mon, 30 Aug 2010 10:05:22 GMT

DEADLINE SET FOR STATES TO REQUEST ADDITIONAL MEDICAID DOLLARS:

The Centers for Medicare and Medicaid Services (CMS) announced on August 18 that states have until September 24 to request an extension of the enhanced Federal Medical Assistance Percentage (FMAP) – the federal government’s share of Medicaid funding.

In one of its final acts before breaking for the August congressional recess, the Senate approved legislation to provide a six month continuation of the enhanced FMAP that was originally included in the 2009 economic stimulus law. Action on the initiative had been in question throughout the summer, due to mounting deficit spending concerns, and the extension was set to expire at the end of 2010 – the middle of the fiscal year for most states. Many states had assumed the FMAP extension would be approved when they set their budgets, and a significant number of states were facing severe economic shortfalls without a backup plan in place.

Senate leaders broke the stalemate by proposing more than $26 billion in offsets in order to keep the legislation – H.R. 1586 – deficit neutral, securing the necessary votes to prevent a filibuster and pass the legislation. Following Senate passage, House Speaker Nancy Pelosi (D-CA) called her chamber back into session the following week, interrupting the beginning of Members’ August recess in order to complete action on the long-stalled initiative.

The House passed H.R. 1586 on August 10 and the measure was signed into law by President Obama later the same day (Public Law 111-226). The package included $16.1 billion in additional Medicaid payments to states, representing a 53.2 percent match to states for the first three months of 2011, a 51.2 percent match for the following three months, and additional funding eligibility for states with rapidly rising unemployment rates. Unrelated to healthcare, the legislation also included $10 billion in education assistance to local school districts in order to prevent teacher layoffs.

In its August 18 informational bulletin, CMS stated that the chief executive officer of each state must submit a written request in order to continue receiving the enhanced FMAP funding through June 2011, and urged states to complete this process expeditiously. The CMS announcement also listed the requirements that states must meet in order to continue receiving the enhanced funding, including maintenance of Medicaid eligibility standards.

CBO ISSUES REPORT EXAMINING MEDICARE AND MEDICAID FINANCES:

On August 19, the Congressional Budget Office (CBO) released a report detailing the finances of the federal government’s two healthcare programs – Medicare and Medicaid.

It reported that Medicare spending is expected to increase less than four percent this year, which could be due to the uncertainty surrounding Congress’ efforts to prevent payment cuts to physicians who participate in the program. Medicaid spending is expected to rise by almost nine percent in 2010, based both on high unemployment rates that have increased program enrollment and the aforementioned increase the federal government’s share of Medicaid spending (FMAP).

The CBO stated that while the new healthcare reform law took steps to restrain Medicare spending – outlays are expected to increase an average of six percent per year through 2020, down from the eight percent average growth over the last decade – the program will still expand faster than the economy. This expected growth can also be attributed to the significant rise in the nation’s over-65 population.

As a result, the CBO stated: “To keep deficits and debt from reaching levels that would substantially harm the economy, policymakers would have to increase revenues significantly as a percentage of GDP, decrease projected spending sharply, or pursue some combination of those two approaches.”

NEXT STEPS:

We continue to monitor Congress, CMS and other relevant federal agencies as the implementation of healthcare reform moves forward and as other related matters arise, and will provide timely updates as these developments occur.

EU: Commission Announces Investigation into International Group of P&I Clubs

Fri, 27 Aug 2010 09:51:37 GMT

On 26 August 2010, the European Commisson (the Commission) opened a competition investigation into the maritime insurance sector, in particular the agreements between the Protection & Indemnity (P&I) Clubs within the International Group of P&I Clubs (the International Group), a worldwide association of thirteen P&I Clubs.

P&I Clubs are mutual non-profit making mutual associations that provide P&I insurance to their member ship owners. The P&I Clubs which are members of the International Group operate agreements between themselves containing rules on the sharing of insurance claims and joint reinsurance and on the contractual relationships between the P&I Clubs and their members.

In February 2009, a 10 year exemption expired, which had been granted to the International Group by the Commission under Article 101(3) of the Treaty on the Functioning of the European Union (TFEU). The agreements between the members of the International Group are not automatically covered by the new competition block exemption for the insurance sector that came into force in April (see previous blog post here) because the market shares of the parties involved are above the relevant thresholds provided for by the block exemption.

The aim of the Commission's investigation is to examine whether certain provisions of the agreements may lessen competition between P&I Clubs and restrict the access of commercial insurers or other mutual P&I insurers to the relevant markets, contrary to Article 101(1) of TFEU.

The Commission's press release can be viewed here.

EU: Fifth Solvency II Quantitative Impact Study Begins with a Call for Participation From the European Commission

Fri, 27 Aug 2010 09:47:50 GMT

The fifth Quantitative Impact Study on the Solvency II implementing measures (QIS5) was launched by the European Commission (the Commission) on 23 August 2010. The study will run until November 2010 and the Commission notes that it is aiming for a participation rate of at least 60% of EU insurance and reinsurance companies and 75% of EU insurance groups. Of particular importance to the Commission is participation by smaller insurance companies and insurance providers specialised in specific business lines.

Solo undertakings must submit responses by the end of October 2010 and group undertakings by mid November 2010.

The Commission's press release can be found here. The full QIS5 documents, published by the Committee of European Insurance and Occupational Pensions Supervisors, are here and here.

UK: FSA Fines Zurich UK

Thu, 26 Aug 2010 12:22:47 GMT

The Financial Services Authority (FSA) has reported that it has fined Zurich UK £2,275,000 for "failing to have adequate systems and controls in place to prevent the loss of customers’ confidential information". According to the FSA's Final Notice, "the breaches related to the management of risks associated with the security of customer information in the context of certain outsourcing arrangements."

Zurich UK has since taken steps to address the data security issues identified by this incident and in a response Stephen Lewis, Chief Executive of Zurich UK, said that Zurich UK had "commissioned a comprehensive review of... data security systems and procedures and [had] taken a number of steps designed to enhance those procedures." Mr Lewis also said that "We are appointing a dedicated Information Security Officer to provide ongoing assurance that appropriate measures are in place and that they will continue to be effective. We believe our customers can be confident that we are doing everything we can to keep their data secure and protected. The FSA has acknowledged that we fully cooperated with its investigation and recognised that we treated the incident with utmost seriousness and have demonstrated a commitment to take the necessary steps to ensure the on-going security of our customer data."

For the FSA press release, please click here.

For the Zurich UK response, please click here.

Eighth Circuit Rules on Diversity Jurisdiction for Federal Actions to Compel Arbitration

Thu, 26 Aug 2010 09:24:30 GMT

A decision of the Eighth Circuit Court of Appeals, Northport Health Services of Arkansas, LLC v. Rutherford, No. 09-2433 (8th Cir. 2010), recently held that diversity of citizenship jurisdiction in the context of a motion to compel arbitration under § 4 of the Federal Arbitration Act (“FAA”) can be determined by looking at the citizenship of the parties named in the proceedings before the district court, plus any indispensible parties who must be joined.

The representatives of the estates of two people admitted to nursing facilities in Arkansas filed actions asserting tort claims in state court against Northport Health Services of Arkansas, LLC (“Northport”), plus the administrators of the two nursing homes. Northport filed suit in federal court to compel arbitration under § 4 of the FAA, alleging federal jurisdiction based upon diversity between the Northport entities (Alabama citizens) and the state court plaintiffs (Arkansas citizens). The representatives did not contest the citizenship allegations, and the district court granted the petition to compel arbitration.

However, after the Supreme Court held that a federal court entertaining a petition to compel arbitration “should determine its jurisdiction by ‘looking through’ a § 4 petition to the parties’ underlying substantive controversy” (see Vaden v. Discover Bank, 129 S. Ct. 1262, 1273 (2009)), the representatives moved to vacate the order compelling arbitration. The district court granted the motions to vacate because the underlying controversy in each case involved a non-diverse party, the nursing home administrators. Northport appealed the rulings.

The Court of Appeals held that although some of the reasoning in Vaden supported the district court’s decision, the Supreme Court’s ruling addressed only federal question jurisdiction, and was thus distinguishable. Specifically, the court noted that Vaden approved the “look through” approach only to the extent that a federal court may “look through” a § 4 petition to determine whether it is predicated on an action that arises under federal law (thus invoking federal question jurisdiction). Thus, the orders of the district court dismissing the cases for lack of subject matter jurisdiction were reversed, and the cases were remanded with directions to re-enter the prior orders compelling arbitration.

Click here to review a copy of the court’s decision.

Massachusetts Health Insurer Settles With Division of Insurance On Rate Increases

Thu, 26 Aug 2010 09:16:30 GMT

Earlier this month, the Massachusetts Division of Insurance (the “Division”) struck a deal with Health New England to settle a dispute over rate increases. In the winter of 2009, Health New England, a Springfield, Massachusetts health insurer, attempted to increase its health insurance premiums by a range of 11.5% to 21.3% for about 21,000 customers. The Division denied this increase on April 1, 2010, along with other insurers who sought double-digit increases. Several of these insurers subsequently sued the Division. In August 2010, the Division and Health New England agreed to an average base rate increase for individual and small business customers of 8.2% for the rest of the year (with actual increases ranging from 5.5% to 14.9%). Along with this agreement, Governor Deval Patrick’s office has now reached accords with five other Massachusetts insurance carriers that were denied increases.

To read our previous blog entry discussing the filing of several suits against the Division in April 2010, click here.

UK: UK Government's "Call for Evidence and Views" on a European Contract Law

Thu, 26 Aug 2010 09:12:31 GMT

On 18 August 2010 the UK Ministry of Justice launched a "Call for Evidence and Views" to inform its response to a European Commission Green Paper on a European contract law.

On 1 July 2010 the European Commission published a Green Paper setting out policy options for introducing a European contract law for consumers and businesses. The Paper identified some of the problems that divergent contract laws in different Member States can cause businesses and consumers and showed how these problems weakened the internal market. For example, in respect of business to consumer contracts, under Article 6 of the Rome I Regulation, if there is a contract between a business registered in one Member State and a consumer domiciled in a different Member State, the contract cannot deprive the consumer of the protection afforded by the law of his Member State, even if the parties have agreed that a different Member State law applies. Businesses with consumers in different Member States therefore have to ensure compliance with a number of Member State laws. This can be costly and undermines the internal market. In respect of business to business contracts, while businesses can chose to adopt a particular Member State law, which will apply regardless of their domicile, they do not have the option of a European contract law which could be uniform across all Member States.

The Green Paper proposes seven possible approaches to dealing with such issues, ranging from maintaining the status quo to creating a mandatory common code of contract law. The "Call for Evidence and Views" from the UK Ministry of Justice asks for responses from the UK public and businesses on this issue. It poses questions to assist those responding, asking them to state what problems they have encountered relating to the divergence of laws at national level and asking them to give their opinions as to the advantages and disadvantages of the seven options set out in the European Commission's Green Paper.

Responses are requested by 26 November 2010, with the European Commission's consultation closing on 31 January 2011. Depending on the evaluation of the results of the consultation, the European Commission could propose taking further action towards a European contract law by 2012.

The Ministry of Justice Call for Evidence can be found here.

The European Commission Green Paper can be found here.

China: China Insurance Regulatory Commission Issues Guidelines to Strengthen Insurers' Control of Funds

Thu, 26 Aug 2010 09:10:07 GMT

On 17 August 2010 the China Insurance Regulatory Commission (the CIRC) issued basic guidelines for the internal controls at Chinese insurance companies, which include monitoring their allocation and management of insurance funds.

The CIRC is encouraging Chinese insurers to organize and implement internal control measures on insurance funds, including asset allocation, asset and liability matching, investment decision making, investment transaction management and asset custody. The CIRC's basic guidelines also require insurers to set up internal control systems to regulate both their marketing campaigns and business operations.

The CIRC hope that internal control systems will reinforce Chinese insurers' corporate governance and assist the CIRC to improve its supervision of insurance companies. The new guidelines are to take effect from 1 January 2011 and the CIRC will establish specific measures for their implementation in due course.

Hong Kong: Pilot Scheme to Permit Insurers to Tap China's Mainland Interbank Bond Market

Thu, 26 Aug 2010 09:05:35 GMT

The People's Bank of China (PBC) announced on 17 August 2010 a pilot scheme to permit Hong Kong and Macau insurers, banks and certain other financial institutions, with the approval of the PBC, to invest in the Chinese mainland's 48.8 trillion renminbi (US$7.2 trillion) interbank bond market. Each institution will receive a quota for Chinese mainland interbank bonds according to its individual situation. The move has been welcomed by the Hong Kong Monetary Authority (HKMA).

The announcement by the PBC liberalises the use of Chinese currency, allowing eligible institutions outside the mainland (including global central banks and the Hong Kong Exchange Fund) to make use of their renminbi holdings to diversify into Chinese mainland assets. The pilot scheme will reduce insurers', banks' and certain other financial institutions' reliance on the US bond market.

The Chief Executive of the HKMA, Mr Norman Chan, has said that this will further promote the development of renminbi trade settlement in Hong Kong, and enhance the attractiveness of renminbi business in Hong Kong. As such, the move is expected to consolidate Hong Kong's position as a renminbi offshore centre. The HKMA has said it will liaise closely with the PBC on the implementation of the pilot scheme.

New Jersey Federal Court Finds That Arbitration Award Was Not in Manifest Disregard of the Law

Wed, 25 Aug 2010 11:24:29 GMT

Plaintiff moved to vacate an arbitration award issued in favor of defendant Stroehmann Bakers on the grounds that, among other things, the arbitrator’s decision was in “manifest disregard of the law.” The U.S. District Court for the District of New Jersey, relying upon Third Circuit case law, noted that plaintiff was required to establish that the arbitrator’s award had absolutely no support from the record in order to prevail on this basis. The court found that plaintiff had failed to meet the standard for manifest disregard of the law, and thus denied plaintiff’s motion to vacate.

Interestingly, the District Court did not discuss whether manifest disregard of the law remains a valid basis to vacate or modify arbitration awards, an issue that has been the subject of debate among federal courts since the U.S. Supreme Court’s decision in Hall Street Associates v. Mattel. Recently, the Supreme Court addressed the manifest disregard standard in a footnote in Stolt-Nielsen S.A. v. AnimalFeeds International Corp., but did not say whether it remains viable. Click here and here to review some of our prior blog posts on this evolving area of the law.

A copy of the district court’s decision, captioned International Brotherhood of Teamsters, Local 701, v. Stroehmann Bakeries, No. 09-6205 (D.N.J. 2010), can be found here.

NAIC Releases Derivatives Risk Mitigation Proposal for Comment

Tue, 24 Aug 2010 14:27:24 GMT

The National Association of Insurance Commissioners ("NAIC") has released a derivatives risk mitigation proposal ("Proposal") prepared by the American Council of Life Insurers ("ACLI") for interim comment. The Proposal would modify the formula for calculating risk-based capital ("RBC") to reflect insurers' use of derivatives to hedge the risks of default or adverse change in fair market value to fixed income securities and common stocks. The Proposal categorizes hedges as either basic, intermediate, or advanced, and provides recommendations for the allowance of RBC credit for basic and intermediate hedges. The Proposal states that the ACLI is not making recommendations concerning advanced hedging (such as tranched transactions, equity options, and first to default baskets) at this time.

According to the ACLI, the Proposal would permit regulators to more accurately evaluate the degree of risk an insurer faces and provide insurers with a regulatory incentive to mitigate such risk.

Comments regarding the Proposal may be submitted to the NAIC until September 17, 2010. To view the Proposal, click here.

Prominent New York State Insurance Department Official to Speak at IFNY Event

Tue, 24 Aug 2010 09:03:36 GMT

EAPD’s New York office will host an Insurance Federation of New York (IFNY) Breakfast on Thursday, September 30, 2010 featuring New York State Insurance Department's Deputy Superintendent and General Counsel, Martha A. Lees. As General Counsel, Lees advises the Superintendent and other officers of the Department regarding a wide array of legal matters and is responsible for supervision of the Office of General Counsel. The breakfast was arranged by Nick Pearson, partner in the Insurance and Reinsurance Department, who is a member of the Board of Trustees of the Insurance Federation of New York.

For more information, please click here.

Lloyd's Market Drafts Exclusion to Ensure Compliance With Iran Sanctions

Mon, 23 Aug 2010 12:23:14 GMT

As previously reported in this blog, President Obama signed into law the Comprehensive Iran Sanctions, Accountability and Divestment Act of 2010 (the "Iran Sanctions Act") in July, following the less stringent sanctions passed earlier by the U.N. For a more detailed discussion of the Iran Sanctions Act, see here. Canada, the European Union and Australia soon followed with similar sanctions aimed at Iran's financial and energy sectors. Notably, the Iran Sanctions Act prohibits the insurance and reinsurance by international insurance firms of risks relating to the Iranian petroleum industry, including cargos of oil and petrochemical equipment. And although the Iran Sanctions Act exempts insurers and reinsurers who conduct due diligence, the statute does not specify what underwriters would have to do to satisfy their due diligence requirement.

While the Lloyd's Market Association previously indicated that it intended to comply with the Iran Sanctions Act by not underwriting petroleum shipments to Iran (see here), it was unclear how underwriters could avoid an inadvertent violation of the sanctions. In response, according to a recent article in Business Insurance, Lloyd's has "developed an exclusion clause to help underwriters ensure they do not breach trade or economic sanctions imposed on countries or organizations around the world." It was further reported that "[t]he exclusion says there are instances in which underwriters cannot provide coverage if a sanction is breached and that certain situations, including imposition of sanctions, prohibit insurers from offering cover," according to Neil Roberts, a senior technical executive at Lloyd's, who was interviewed for the article. The new exclusion, developed by underwriters in the marine hull market, will replace the ad hoc wording developed by underwriters in the other markets, Mr. Roberts is reported as stating.

Reminder: Please Join the U.S. Re Under 40s Group on August 26 in New York

Mon, 23 Aug 2010 12:11:15 GMT

As a reminder, the U.S. Reinsurance Under 40s Group event will be hosting an event at the rooftop of Hotel Indigo on August 26, starting at 5:30. The rooftop promises great views of New York and an opportunity to network with others in the industry.

You can click here to RSVP. You can visit the Group's website to learn more about the Re Under 40s s or email Brian Green or Rob DiUbaldo, who are both on the Group's board if you have any questions.

We hope to see you on August 26.

Eleventh Circuit Rules that Party Did Not Waive Its Right to Arbitrate

Mon, 23 Aug 2010 08:52:05 GMT

In Citibank, N.A. v. Stok & Associates, P.A., No. 09-13556 (11th Cir. July 20, 2010), the United States Court of Appeals for the Eleventh Circuit ruled that a party did not waive its right to compel arbitration even though it initially participated in the court proceeding.

Stok & Associates, P.A. (“Stok”) filed suit in Florida state court against Citibank, N.A. (“Citibank”) alleging several causes of action. A few weeks after filing its answer, Citibank wrote to Stok demanding arbitration, which Stok opposed. Citibank then filed a petition in federal court to compel arbitration and stay the state court proceeding pursuant to an arbitration agreement in the contract between the parties, which provided that either party “may elect to require any dispute between [them] … be resolved by binding arbitration.” The district court denied the motion, finding Citibank “had participated in the state court action in a manner that prejudiced Stok, thereby waiving its right to compel arbitration.”

The Eleventh Circuit reversed the district court’s decision, finding that Stok could not establish that Citibank’s participation in litigation caused it to suffer prejudice, focusing specifically on the length of delay in demanding arbitration and the expenses incurred by Stok (both if which it found minimal). As such, the court held that Stok did not meet its burden of demonstrating prejudice sufficient to warrant a finding of waiver.

Click here to review a copy of the court’s decision.

California Sets Deadlines for 2010 Application Reviews

Wed, 18 Aug 2010 14:39:32 GMT

The California Department of Insurance (the “CDI”) has issued a notice establishing deadlines for all applications seeking approval by 2010 year-end. Corporate applications must be received by September 17, 2010. Holding company applications must be received by October 29, 2010. All applications seeking year-end approval should be complete when submitted, contain a duplicate copy, and be accompanied by a cover letter requesting expedited review with an explanation as to why expedited review is necessary.

Click here for a complete copy of the notice.

Third Circuit Revives Limited Portions of In Re: Insurance Brokerage Antitrust Litigation (MDL 1663)

Wed, 18 Aug 2010 13:40:10 GMT

Nearly three years after a federal district court dismissed with prejudice a nationwide class action alleging antitrust and RICO claims against insurers and brokers in connection with contingent commission arrangements, the Third Circuit Court of Appeals has revived a limited swath of plaintiffs' claims. The Third Circuit concluded that plaintiffs' allegations regarding contingent commission arrangements alone were insufficient to support antitrust and RICO claims. With respect to plaintiffs' allegations of a Marsh-centered conspiracy (for the antitrust claim) and enterprise (for the RICO claim), however, the court concluded that plaintiffs' allegations of bid-rigging with respect to excess casualty policies placed by Marsh were sufficient to support such claims, but only with respect to those defendants specifically alleged to have engaged in bid-rigging. In addition, the Third Circuit vacated the dismissal of RICO claims premised on the allegation that the CIAB constitutes a RICO enterprise through which the broker defendants engaged in a pattern of racketeering activity.

The Third Circuit’s decision does not end the motion to dismiss phase in this long-running litigation. The case will now be remanded to the district court for further proceedings, including consideration of whether plaintiffs adequately pleaded other elements of the reinstated claims.

Click here to review a copy of the Third Circuit's decision.

To view past posts on this topic, click here.

Connecticut State Court Finds that a Court is Permitted to Remand an Arbitration Award to Panel for Clarification Post-Hall Street

Wed, 18 Aug 2010 12:30:13 GMT

Plaintiff Hartford Steam Boiler Inspection and Insurance Company (“Hartford”) appealed a decision permitting a court to remand a dispute over an arbitral award to the arbitration panel for clarification of that award. Hartford argued that the court’s holding was overruled by the U.S. Supreme Court’s decision in Hall Street Associates, LLC v. Mattel, Inc., 552 U.S. 576 (2008).

The Connecticut appellate court affirmed the trial court’s decision, finding that Hall Street “made no mention whatsoever” of whether a court could remand a dispute over an arbitration award to the panel for clarification. Rather, the court noted that Hall Street involved whether parties to an arbitration agreement could supplement the statutory grounds for vacating or modifying an arbitration award under the Federal Arbitration Act (the Supreme Court held that parties cannot). Thus, the appellate court found that Hall Street was inapplicable, and that the Supreme Court did not alter the body of federal and state law permitting a court to remand a dispute over the clarity of an arbitration award to the arbitrators.

Click here to review a copy of the appellate court’s decision, entitled Hartford Steam Boiler Inspection & Insurance Company v. Underwriters at Lloyd’s & Companies Collective, et al., (Ct. App. Ct. 2010).

Join the U.S. Re Under 40s Group on August 26 in New York

Tue, 17 Aug 2010 08:52:14 GMT

The next U.S. Re Under 40s Group event will be at the rooftop of Hotel Indigo on August 26, starting at 5:30. The rooftop promises great views of New York and an opportunity to network with others in the industry.

You can click here to RSVP. You can visit the Group's website here to learn more about the U40s or e-mail Brian Green or Rob DiUbaldo, who are both on the Group's board if you have any questions.

We hope to see you on August 26.

Eighth Circuit Rules That General Liability Insurer Must Defend Claim for Lost Use of Personal Computer Under Both General Liability Policy and Information and Network Technology Errors or Omissions Liability Policy

Mon, 16 Aug 2010 14:52:43 GMT

In late July 2010, the Eighth Circuit Court of Appeals held that an insurer that issued a General Liability policy and an Information and Network Technology Errors or Omissions Liability policy must provide a defense to its insured under both policies for a claim that alleges the insured infected the underlying claimant’s computer with a spyware program, allegedly affecting the operation of the computer. Eyeblaster, Inc. v. Federal Ins. Co., No. 08-3640 (8th Cir., July 28, 2010). In doing so, it reversed the lower court’s decision in which it held that the insurer need not provide a defense to its insured under either policy, which we discussed here.

The Court’s decision applied Minnesota law. In its discussion of the general liability policy, the Court focused on that portion of the definition of “property damage” that obligates the insurer to provide coverage for a claim alleging “loss of use of tangible property that is not physically injured.” The underlying claimant had alleged that the spyware caused his computer to freeze, crash, and operate so slowly that it had in essence become inoperable.” While the policy excluded “software, data or other information that is in electronic form” from its definition of “tangible property,” the Court found that the “plain meaning” of tangible property includes computers, and that the underlying claimant’s complaint “alleges repeatedly the ‘loss of use’ of [the] computer.” Therefore, the Court found that the allegations regarding the computer becoming inoperable constituted a claim of the loss of use of tangible property as defined by the policy, and the insurer owed a duty to defend the insured with respect to those claims. The Court also found that the insurer had not met its burden in proving that an exclusion for “Damage to Impaired Property or Property not Physically Injured” applied to the claims regarding the inoperable computer. In addition, the Court noted that there had been “no convincing argument” that “Expected or Intended Injury” or “Intellectual Property Laws or Rights” exclusions applied. The decision also notes that the insured’s services are known as “rich media advertising’ that allows customers to track and manage the performance of advertising campaigns, and “uses cookies, which are typically used in the advertising industry to measure and enhance the effectiveness of an advertising campaign” and “does not use spyware or introduce malicious contact such as spam, viruses or malware.”

In deciding that there was also a duty to defend under the Information and Network Technolgy Errors or Omissions Liability policy , the Court noted that it has defined “error” in a technology errors and omissions policy “to include intentional, non-negligent acts but to exclude intentionally wrongful conduct.” It further noted that the insurer had not pointed to evidence that the intentional acts alleged were intentionally wrongful.

The case was remanded for further proceedings.

Please click here to read a copy of the court’s decision.

Update: New York State Court Finds that Follow the Settlements Doctrine Does Not Apply

Mon, 16 Aug 2010 11:28:47 GMT

Recently, in American Home Assurance Co. v. American Re-Insurance Co., No. 602485/06 (N.Y. Sup. Ct. May 27, 2010), the Supreme Court, New York County (Ramos, J.) granted Defendants’ (the reinsurers’) summary judgment motions, finding that Plaintiffs’(the insurers’) claims were not reasonably within the scope of or arguably covered by its underlying policies with Monsanto. As such, the reinsurers were not bound to follow the settlement. The court also found that in entering into the settlement with Monsanto, plaintiffs glossed over critical coverage issues, unnecessarily exposing the reinsurers to non-covered claims. Specifically, the court noted that plaintiffs’ policies contained certain exclusions that appeared to provide a valid defense to at least some of the claims covered by the settlement with Monsanto. Thus, the court further held that the reinsurers did not have to follow the settlement because plaintiffs failed to conduct a reasonable, businesslike investigation of the underlying claims before making its settlement payment to Monsanto. To review our previous blog post, click here.

On or about July 28, 2010, plaintiffs filed a notice of appeal to the Appellate Division, First Department. Plaintiffs, according to their pre-argument statement, seek a reversal of the Supreme Court, New York County decision, asserting that:

It was error to dismiss Plaintiffs’ causes of action against Defendant because New York law requires that the Defendant reinsurers follow the good faith settlement that Plaintiffs entered into with their insured. The IAS Court erred in failing properly to consider the effect of a 1993 settlement with Monsanto on the Anniston losses for which reimbursement was claimed and further in completely ignoring the triable issues of fact created by, inter alia, the expert affidavit submitted by Plaintiffs to the effect that the 1993 agreement is a settlement of the type that is routinely and customarily binding on reinsurers under the doctrine of follow the settlements.

Indeed, this notice of appeal has not been perfected and therefore we will continue to monitor this case for the likely appeal.

Bermuda Legislation Imposes a One-Time Levy on Some Class Four Insurance Companies

Fri, 13 Aug 2010 15:51:51 GMT

In an effort to cover the costs of raising supervisory standards, the Insurance Companies (Special Fees) Act will impose an one-off $230,000 levy on certain Class 4 insurance companies in Bermuda. It is estimated that 37 Class 4 insurers will have to pay the levy which is intended to infuse the Bermuda Monetary Authority with additional funds needed to draft and prepare regulations required under Bermuda’s Insurance Solvency Framework, also known as the Solvency II Roadmap.

Finance Minister Paula Cox said that the $230,000 fee will apply to companies with a gross premium of $1.2 billion or more in 2009 and that a sliding scale would be applied to other companies. These fees will be due by the end of September and a 10% per month fine will be imposed on any company that fails to pay its fee. The Finance Minister gave assurances that the affected insurers were consulted on the initiative. The legislation was supported generally by the Bermuda based reinsurers and both opposition parties in the Bermuda legislature endorsed the bill.

UK: Financial Services Authority Confirms Payment Protection Insurance Measures

Fri, 13 Aug 2010 09:59:59 GMT

On 10 August 2010, the Financial Services Authority published a Policy Statement confirming its package of measures to protect consumers of payment protection insurance (PPI).

The Policy Statement follows the Consultation Paper issued in March 2010 (CP10/6)(see our blog here). The FSA confirms in the Policy Statement that it will broadly proceed with the proposed measures set out in CP10/6, with some amendments made to take into account concerns raised by the industry in responses to CP10/6.

The measures include:

• new FSA handbook guidance to ensure PPI complaints are handled properly (and redressed fairly, where appropriate);

• an explanation of when and why firms should analyse past complaints to identify if there are serious flaws in sales practices that may have affected both complainants and non-complainants; and

• an open letter setting out common sales failings to help firms identify bad practice.

These measures must be implemented by 1 December 2010.

A copy of the FSA's press release can be found here. The full Policy Statement can be found here.

Connecticut Supreme Court Limits Attorney General’s Power to Disclose Documents Subpoenaed from Insurer

Fri, 13 Aug 2010 09:43:01 GMT

Last week, the Connecticut Supreme Court issued a ruling in which it placed several restrictions on the uses that the Connecticut Attorney General (AG) may make of documents subpoenaed from a Florida-based insurer during an antitrust investigation.

At issue in the case was the confidentiality provision contained in the Connecticut Antitrust Act, which provides that information and documents furnished to the AG during an antitrust investigation shall not be available to the public. The Court explained that the antitrust statute balances broad investigatory powers granted to the AG with protections given to the investigatory targets. The Court went on to hold that the confidential documents may not be disclosed to members of the public as part of the antitrust investigation; that the target of the subpoena must be given notice and a hearing before its confidential documents may be used in any court proceeding; and that if the AG wishes to share the confidential documents with other government entities, those entities must also comply with the confidentiality provisions of the statute.

Please click here to read a copy of the court’s decision.

New York Attorney General Files Response to Article 78 Petition to Prevent the Producer Compensation Disclosure Requirements of Regulation 194; Petitioners Gear Up for Rebuttal

Fri, 13 Aug 2010 09:28:28 GMT

Earlier this year, the Independent Insurance Agents and Brokers of New York (the “IIABNY”) and the Council of Insurance Brokers of Greater New York (the “CIBGNY”) filed an Article 78 petition in New York State Supreme Court in Albany County against the New York Insurance Department (the “NYID”) in order to prevent the mandatory producer compensation disclosure requirements of Regulation 194^[1]. The claim filed by the IIABNY and CIBGNY alleges that the NYID exceeded its statutory authority in promulgating Regulation 194 and that certain of its “provisions are arbitrary and lack a rational basis.”

At the end of July, the New York Attorney General’s office filed its response, wherein it defended the NYID against accusations that it exceeded its authority in adopting Regulation 194 and asked that the IIABNY and the CIBGNY’s petition be dismissed. The response argues that the NYID engaged in an exhaustive regulatory process in which it “fairly balance[d] the interests of licensed insurance producers with the needs and expectations of insurance consumers.”

Further, according to the response, the adoption process was not only proper, but in addition, Regulation 194 “addresses a missing component in financial services oversight.” By way of analogy, the Attorney General pointed to the compensation disclosure requirements for stockbrokers, real estate agents and mortgage brokers, who “must all disclose to their clients any compensation they receive from third parties for work on their clients' behalf."

The IIABNY and the CIBGNY have until August 20, 2010 to file their rebuttal. In a press release, the IIABNY has stated that they and the CIBGNY “have vigorously contended that this regulation was issued completely without the required statutory authority, and that certain of its provisions are arbitrary, unreasonable and unconstitutional.”

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^[1] Regulation 194 requires producers to disclose certain compensation information to purchasers before they apply for a policy, including: (1) a description of the producer’s role in the sale; (2) whether the producer will receive compensation from the selling insurer or another third party; (3) that the compensation paid to the producer may vary depending on a number of factors, including the insurance contract and the insurer that the purchaser selects; and (4) that, upon request, the purchaser can obtain information from the producer regarding the producer’s expected compensation for the sale, as well as expected compensation for any alternative quotes presented by the producer.

D&O Insurers Face Potential Exposure on Deepwater Horizon Claims

Fri, 13 Aug 2010 09:25:32 GMT

Media reports suggest that BP’s D&O insurers could face significant exposure to claims stemming from the Deepwater Horizon disaster. As we previously reported, BP self-insures much of its property and liability cover through its captive insurer, Jupiter Insurance Ltd. According to media reports, Jupiter does not purchase reinsurance; but it does currently have over $700 million on hand to respond to Deepwater Horizon claims. Several Deepwater Horizon-related lawsuits that were recently filed against BP’s directors have brought out evidence that BP purchased substantial D&O coverage in the commercial market.

Reports suggest that BP management, seeking to avoid potential conflicts of interest, purchased $400 million in Side-A D&O liability coverage through Marsh Ltd., all of which was in force at the time of the Deepwater Horizon explosion. The coverage is arranged in an eight-layered tower. Ace Bermuda International has the primary layer ($25 million), over which Zurich wrote $25 million in first-layer excess coverage. Other insurers participating in the program include Chartis, Ace European Group, Axis, Liberty Mutual, The Hartford, QBE, Arch, Great Lakes, and Beazley. The $155 million top-level excess layer is divided into shares, of which Chartis has the largest ($20 million).

The fact that BP purchased such a large D&O insurance program suggests that a significant cross-section of the international D&O market has potential exposure on Deepwater Horizon claims.

We will continue to provide updates on this and other Deepwater Horizon-related insurance issues on www.InsureReinsure.com.

Improvements Proposed to Insurance Accounting

Thu, 12 Aug 2010 11:11:34 GMT

The International Accounting Standards Board (IASB) has published its draft proposals to improve accounting for insurance contracts. The draft proposes a single International Financial Reporting Standard (IFRS) that all insurers, in all jurisdictions, could apply to all contract types on a consistent basis.

The proposals are the result of a comprehensive review of insurance accounting begun in 2004 and a public consultation begun in 2007. The IASB said the proposed standard better reflects the economics of insurance contracts, and would result in more relevant, understandable and comparable information being available to insurers.
The draft 'Insurance Contracts' is open for public comment until 30 November 2010 and can be accessed via the 'Comment on a Proposal' section of the IASB website, www.ifrs.org.

UK/Europe: English High Court Considers the Application of Rome II

Thu, 12 Aug 2010 11:06:24 GMT

In Robert Bacon v Nacional Suiza Cia Seguros Y Reseguros SA [2010] EWHC 2017 (QB), Mr Justice Tomlinson, in a preliminary issue hearing, was asked to determine (i) the grounds why Spanish law was applicable to the Defendant's liability; and (ii) the issue of liability itself.

The Claimant, Mr Bacon, was seriously injured having been struck by a car on 7 September 2007 whilst on holiday in Spain. The Defendant, Nacional, provided liability insurance to the driver of the vehicle that struck Mr Bacon. The parties were agreed that the Defendant's liability was to be determined by applying Spanish law. What was disputed was why.

The Defendant submitted that it was by virtue of Regulation (EC) No. 864/2007 of 11 July 2007 on the law applicable to non-contractual obligations, commonly referred to as "Rome II". The Claimant however submitted that Rome II was, on its own terms, not applicable to a claim for damages arising out of an accident which occurred on 7 September 2007. The judge referred to this issue as "the temporal scope of Rome II."

Article 297 of the Treaty on the Functioning of the European Union states that EU Legislative Acts "shall enter into force on the date specified in them, or, in the absence thereof, on the twentieth day following that publication". Rome II was published on 31 July 2007 therefore unless a date was specified, it entered into force on 20 August 2007. Article 32 of Rome II states that: "This Regulation shall apply from 11 January 2009". The difference between "enter into force" and "shall apply" was referred to by the judge as a well established concept in European Union law despite its apparent oddity to English eyes. The judge found that the European legislature had clearly intended that there should be a difference between the entry into force of Rome II and its subsequent application.

Tomlinson J held that:

1. As to the liability of the driver, the judge found that on the evidence the Claimant was entirely to blame for the accident. The evidence that led the judge to find this is unremarkable.
2. Obiter (the judge's finding on liability negated the need to examine the temporal scope of Rome II), had the driver been liable in any respect, Spanish law would govern the "existence, the nature and the assessment of damage, or the remedy claimed because of the applicability of Rome II."

In relation to the applicability of Rome II, Tomlinson J held that Rome II dictates that, as from 11 January 2009, the law to be applied "to a non-contractual obligation arising out of events giving rise to damage occurring on or after 20 August 2007 shall be as prescribed by [Rome II]."

The judge also referred to his reading of the judgment of Mrs Justice Slade, DBE, in Homawoo v GMF Assurance SA [2010] EWHC 1941 (QB) who had herself been asked to determine whether Rome II applied to a claim. In Homawoo, Slade J held that it was necessary to refer the matter for determination to the European Court of Justice (ECJ), however it was her preliminary view that Rome II applied only to accidents which occurred on or after 11 January 2009.

Homawoo has been referred to the ECJ, however until this issue of the temporal scope of Rome II is authoritatively determined, there exists scope for argument as to whether Rome II should be applied to accidents occurring between 20 August 2007 and 10 January 2009.

To view the judgment in Bacon v Nacional click here.

To view the judgment in Homawoo v GMF click here.

Oil Rig’s Insured Losses estimated to be $4 Billion to $6 Billion

Thu, 12 Aug 2010 09:21:20 GMT

According to a recent article in Business Insurance, risk management consulting firm Towers Watson & Co. estimates that commercially insured losses from the explosion at the Deepwater Horizon oil rig in the Gulf of Mexico will be between $4 billion and $6 billion. Nonetheless, Towers Watson notes that its estimate represents only a fraction of the overall economic loss suffered from the Gulf oil spill, which so far is estimated to be $35 billion. To that end, the article reported that Towers Watson does not expect that Deepwater is a sufficiently significant event to turn the overall commercial insurance market.

Towers Watson further stated that the owner of the drilling rig, Transocean Ltd., has a total of $945 million of insurance coverage on it. Anadarko Petroleum Corp. and Mitsui & Co. Ltd.—which are part of a joint venture as operators of the well— have $163 million and $45 million in insurance coverage, respectively. BP P.L.C., also a member of the joint venture, reportedly has no commercial liability insurance coverage but has its own captive insurer, Jupiter Insurance Ltd. The total coverage limits for all involved is reported to be $3.3 billion, with the possibility that other companies may be drawn into litigation.

Upstream Insurers See Losses From Gulf Oil Spill But Continue Business

Thu, 12 Aug 2010 09:19:31 GMT

According to a recent Dow Jones News Service article, leading insurance companies have recently stated that they do not expect the Deepwater Horizon explosion in the Gulf to be a catastrophic event for the so-called “upstream” insurance market. The upstream insurance market, which sells coverage to companies that are involved in the search for, development and production of oil, operates in its own niche of the property and casualty insurance industry collecting roughly $2.5 billion a year in premiums.

The Deepwater disaster could leave the upstream insurance market with a total loss of roughly $1 billion, according to Jim Pierce, chairman of the Global Energy Practice at Marsh & McLennan, as named in the article. While this loss seems significant, the Pierce noted that the upstream insurance market lost many times more that amount from Hurricanes Katrina, Rita and Ike. One reason for the reduced insurance losses is that BP did not purchase insurance, but chose to insure itself, partly through a captive insurer, which itself did not buy reinsurance. The Dow Jones article notes that for these reasons, and a heavy reliance on reinsurers, it appears that few of the upstream insurers have dropped out of the business.

UK: Appointment of Arbitral Tribunal by English Court

Thu, 12 Aug 2010 09:12:58 GMT

In Chalbury Mccouat International Ltd v. P.G. Foils Ltd [2010] EWHC 2050 (TCC) a dispute had arisen between Chalbury, an English company, and Foils, an Indian company, under a contract between Chalbury and Foils for the dismantling of a manufacturing plant in the Netherlands. The contract contained an arbitration clause which did not provide a procedure for the appointment of a tribunal. The parties failed to appoint a tribunal. Chalbury applied to the English court seeking the court's assistance to exercise its powers under section 18 of the Arbitration Act 1996 (the Act), which gives the court powers concerning the appointment of arbitral tribunals where the parties have failed to agree a procedure to appoint and where the parties have failed to appoint.

The arbitration clause in the contract did not designate the seat of the arbitration. Therefore, the court had to determine, under section 2(4) of the Act, whether, by reason of a connection with England, it was satisfied that it was appropriate to exercise the court's powers under section 18 of the Act. The court found that the likely proper law of the dispute between the parties was English law, the seat of the arbitration was more likely to be England than India, and that payment under the contract was to be made in England. The only connection with India which the court accepted was that Foils was an Indian company operating in India. Accordingly, the court found that there was a sufficient connection with England for the court to exercise its powers under section 18 of the Act, and in exercising those powers, the court gave directions for the appointment of the arbitral tribunal, namely by appointment of the London Court of International Arbitration.

This case demonstrates that, if parties agree to arbitrate disputes, they should at the bare minimum make provision for the proper law of the dispute, the seat of the arbitration and the procedure for the appointment of the arbitral tribunal.

Florida’s Statutory Reduction of ILIT Trustee Liability

Wed, 11 Aug 2010 11:35:08 GMT

Effective July 1, 2010, Florida joined several other states in reducing the liability of trustees of irrevocable life insurance trusts (“ILITs”), with the enactment of § 736.0902 - Non-application of prudent investor rule. The Florida prudent investor rule protections relieve the trustee from any duty to manage the life insurance as an investment. Further, it relieves the trustee from liability for any loss sustained with respect to the life insurance.

The statute also removes any duty to determine whether there is a sufficient insurable interest in the policy as long as the trustee did not have knowledge of a lack of insurable interest or a STOLI-type arrangement. However, through the “qualified person” concept, the applicability of the protection depends on the source of funds for payment of the premiums.

A trust agreement can opt out of the application of the statute, and unless the trust agreement opts in, beneficiaries can eliminate the application of the statute by objecting upon receipt of notice.

Hong Kong: "High-Risk Pool" to Take Heat off Health Insurers

Wed, 11 Aug 2010 10:37:21 GMT

The Government of the Hong Kong Special Administrative Region (the Hong Kong Government) is considering subsidising a separate insurance pool to cover Hong Kong residents at high risk of medical complications (defined as those with medical costs expected to be more than 200% of those of healthy individuals) or those with pre-existing medical conditions (high-risk individuals) who sign up to a proposed voluntary medical scheme (the Scheme) that will be generally open to all Hong Kong residents.

It is proposed that under the Scheme, insurance companies would provide their policyholders with a basic health insurance plan featuring guaranteed renewal for life and coverage of certain packaged services at private hospitals. In addition to the basic plan, insurers would be able to market "top-up" plans to clients offering better coverage. All patients would pay only a portion of their medical bills under an arrangement known as "co-payments".

A major obstacle to the Scheme is that high-risk individuals would have to be provided with adequate coverage, which insurers say would be too expensive. However, should the Hong Kong Government set up a separate "high-risk pool", supported by a government subsidy as proposed, to finance the care of those high-risk individuals, then insurers would be less likely to object to the setting up of the Scheme.

Insurers would place all their high-risk policyholders into the high-risk pool. To ensure that this pool has sufficient funds to pay any claims made, insurers would contribute a percentage of the premiums paid by all Scheme participants for reinsurance protection and the Hong Kong Government would make up any shortfall in funds should there be a deficit.

The Hong Kong Government has assured interested stakeholders that the separate high-risk pool would be appropriately regulated and transparent. However, of continuing concern is how much healthy participants in the Scheme would subsidise those participants deemed to be high-risk.

EAPD Announces Publication of 2010 Insurance and Reinsurance Guide

Wed, 11 Aug 2010 10:19:23 GMT

Edwards Angell Palmer & Dodge is proud to provide its clients and friends with a comprehensive introductory guide to insurance and reinsurance regulations, claims, coverage, and transaction-related information and tips. This collection touches on both the US and UK laws and business practices and reflects the work of our attorney teams across practices and around the world.

Getting the Deal Through - Insurance and Reinsurance (2010) is an annual publication for corporate counsel and legal practitioners that sets forth the comparative law on key insurance and reinsurance issues in 31 jurisdictions worldwide. New York partner Paul Kanefsky acted as contributing editor to this book.‪ ‬ ‪EAPD provided the annual update and analysis for the UK and US portions of the book and the uniform set of issues addressed for each country. The UK segment was authored by London-based professional support lawyer Victoria Anderson and London associates Sam Tacey and Theo Godfrey, and the US portion was authored by US partners Paul Kanefsky, Charles Welsh, Michael Griffin and Laurie Kamaiko and US associate Robert DiUbaldo.‬ ‪ ‬ ‪ Please email insurereinsure@eapdlaw.com to request a free US and/or UK version of this guide. For additional information, please click here.

Venezuela’s New Insurance Activity Law Comes Into Force

Mon, 09 Aug 2010 15:14:29 GMT

The Venezuelan National Assembly has published in an extraordinary Official Gazette the new Insurance Activity Law, under which the insurance regulator is granted substantial new powers to intervene in the industry. The law, which was published on 29 July, is a complete redrafting of the 1995 Insurance Law and is in line with President Hugo Chavez's plans to redraw the economy. The law lists some 26 prohibited acts for insurance and reinsurance companies, including provisions governing group structure and which activities can be carried out by insurers.

For additional information on the new Venezuelan insurance law, please click on "Email the Editor" and leave your contact information for follow-up by an EAPD attorney.

UK: Court of Appeal Rules on Substitution of a Party After Expiration of Limitation

Mon, 09 Aug 2010 10:28:37 GMT

The Court of Appeal has had to consider the application of Civil Procedure Rule (CPR) 19.5 in the case of Lockheed Martin Corporation v Willis Group Ltd [2010] EWCA Civ 927. Lockheed Martin entered into a global settlement agreement with London Market insurance companies in 2002. However, it was unable to claim all that was due to it under that agreement because many of the insurance policies in question had been lost and could not be identified. As a consequence, Lockheed Martin brought proceedings against its broker for professional negligence.

Lockheed Martin issued proceedings against Willis Group Holdings Limited (Holdings) just days before the limitation period for the claim was to expire. Subsequently, Lockheed Martin learned that Holdings was a Bermudian company and not the UK holding company it had intended to claim against, Willis Group Limited (Group).

Lockheed Martin applied to the court to substitute Group for Holdings using CPR 19.5. That rule permits the court, in limited circumstances, to add or substitute parties to litigation after the expiry of the relevant limitation period. The judge at first instance rejected the application on the basis of the application of case law pre-dating the adoption of the CPR. The Court of Appeal found that the judge at first instance had misapplied the law by using this approach. However, the Court of Appeal found that Lockheed Martin had no better a case against Group than it did against Holdings. This meant that Lockheed Martin was unable to fulfil the requirement of CPR 19.5(2)(b), "The court may add or substitute a party only if… (b) the addition or substitution is necessary." The Court of Appeal did not have jurisdiction to permit the substitution as it was not "necessary".

The case usefully shows how the court will approach the application of CPR 19.5. It also shows the narrow jurisdiction given to the court when allowing the substitution or addition of parties after a limitation period has expired.

Healthcare News from Capitol Hill and the Department of Health and Human Services – August 9, 2010

Mon, 09 Aug 2010 10:19:55 GMT

CMS PROPOSES CHANGES TO “36 MONTH RULE” FOR HOME HEALTH:

In late July, the Centers for Medicare and Medicaid Services (CMS) published a proposed rule for the Medicare Home Health Prospective Payment System (HH PPS) Rate Update for Calendar Year 2011. As anticipated, the proposed rule promulgates changes to the so-called “36 month rule” for home health agencies (HHAs) that went into effect in January 2010.

CMS implemented the 36 month rule as part of its home health program integrity efforts, in order to put a stop to the “certificate mill” practice in which a party receives Medicare certification for a new HHA, undergoes a survey, and then promptly sells the new HHA before ever seeing one patient or hiring one provider. Under the rule the provider agreement and Medicare billing privileges do not convey to a new owner if an HHA owner sells, transfers or relinquishes ownership within 36 months after the effective date of Medicare enrollment.

However, while responding to this problematic practice, the 36 month rule has had the unintended consequence of harming the business of legitimate HHAs and potentially affecting financing to the industry. In its recently-released proposed rule, CMS acknowledges that it has received “a number” of comments regarding the impact of the 36 month rule on legitimate business transactions, and consequently puts forth a list of exemptions to the provision for certain HHA transactions. As taken from the 2011 HH PPS proposed rule, such exemptions are:

·        A publicly-traded company is acquiring another HHA and both entities have submitted cost reports to Medicare for the previous five (5) years;
·        An HHA parent company is undergoing an internal corporate restructuring, such as a merger or consolidation, and the HHA has submitted a cost report to Medicare for the previous five (5) years;
·        The owners of an existing HHA decide to change the existing business structure (e.g., partnership to a limited liability corporation or sole proprietorship to subchapter S corporation), the individual owners remain the same, and there is no change in majority ownership (i.e., 50 percent or more ownership in the HHA); and
·        The death of an owner who owns 49 percent or less interest in an HHA (where several individuals and/or organizations are co-owners of an HHA and one of the owners dies).

The HH PPS proposed rule for 2011 also defines “change in majority ownership” as follows: “Change in majority ownership occurs when an individual or organization acquires more than 50 percent interest in an HHA during the 36 [months] following the initial enrollment into the Medicare program or a change of ownership (including asset sale, stock transfer, merger, or consolidation). This includes an individual or organization that acquires majority ownership in an HHA through the cumulative effect of asset sales, stock transfers, consolidations, and/or mergers during a 36 month period.”

While the proposed changes to the 36 month rule in the 2011 HH PPS proposed rule are intended by CMS to address the negative impact the provision has on certain legitimate HHA transactions, the proposed language does not specifically address situations such as change in majority ownership transactions that may be pending when the rule is finalized and the exercise of commercially recognized remedies by lenders and investors. Further, some industry observers have questioned whether the proposed language requires the 36 month period to start anew following a change in ownership subsequent to the expiration of the 36 month period following initial enrollment in the Medicare program.

Application of the proposed rule as currently written could have an unwanted chilling effect on bona fide financing, lending and M&A transactions. In order to rectify this situation, CMS can in the final rule clarify its application while still addressing the concern the rule was originally intended to treat.

The 2011 HH PPS proposed rule was published in the Federal Register on July 23, 2010. Comments on the proposal are due to CMS by September 14, 2010.

NEXT STEPS:

We will continue to monitor Congress, CMS and other relevant federal agencies as the implementation of healthcare reform progresses, as new information becomes available on the 36 month rule, and as other healthcare matters arise. We will also continue to provide updates as these developments occur.

Venezuela, Guatemala and Nicaragua Approve New Insurance Laws

Fri, 06 Aug 2010 15:57:47 GMT

The legislatures of Venezuela, Guatemala and Nicaragua have each recently approved new laws governing the activities of insurers, reinsurers and (re)insurance intermediaries concerning risks located within the respective countries. The new laws in Nicaragua and Guatemala were driven by the requirements of the Dominican Republic--Central America Free Trade Act, while the changes in Venezuela were motivated by perceived abuses in the industry and the need to further protect consumers.

These new laws fundamentally overhaul the regulatory schemes applicable to both domestic and foreign insurance and reinsurance entities with activities concerning these jurisdictions, including adjustments to premium taxation rates, minimum requirements for authorization, approval of insurance products, conduct of cross-border business and penalties for non-compliance with local laws and regulations.

If you would like further information on the implications of these new laws, please click on the "Email the Editor" button and provide your contact information for follow-up by an EAPD attorney.

New York Considers Amendment to Credit for Reinsurance Regulation

Fri, 06 Aug 2010 13:10:45 GMT

The comment period for the New York Insurance Department’s (“NYID”) Proposed Tenth Amendment to New York Regulations 17, 20 and 20-A (the “2010 Proposal”) came to a close on August 4, 2010. The 2010 Proposal, which was released for public comment on July 22, 2010, would reduce the amount of collateral that unauthorized reinsurers must post in order for insurers to receive full credit for reinsurance ceded. To be eligible for the reduced collateral under the 2010 Proposal, reinsurers would need to satisfy a number of requirements, including maintenance of at least $250 million in policyholder surplus. For alien reinsurers to be eligible, the regulator of their home jurisdiction would also need to (i) execute a memorandum of understanding with the NYID, and (ii) grant U.S. reinsurers reciprocal access to the home jurisdiction. Under the 2010 Proposal, the Superintendent would assign ratings to unauthorized reinsurers, ranging from Secure-1 to Vulnerable-5, and the amount of collateral required of the reinsurer would be determined based upon the rating assigned.

The 2010 Proposal follows a similar draft amendment to Regulation 20 that was published for public comment on December 24, 2008 (the "2008 Proposal"), which would have prohibited arbitration as a dispute resolution mechanism for ceding insurers seeking reinsurance credit under the 2008 Proposal. The 2010 Proposal would not override agreements between ceding and assuming insurers to arbitrate, but would require that each party consent to the jurisdiction of U.S. courts.

The 2010 Proposal would also make ceding insurers subject to notification requirements regarding concentration of risk in an individual reinsurer or group of affiliated reinsurers.

To view the 2010 Proposal, click here.

UK: English High Court Accepts Incorporation of Terrorism Exclusion Clause in PPL Policy

Fri, 06 Aug 2010 10:39:22 GMT

In Axa Corporate Solutions SA v National Westminster Bank Plc & Marsh Ltd [2010] EWHC 1915 (Comm) Axa sought a declaration by the Court that a terrorism exclusion clause had been incorporated into its renewal of a public and products liability (PPL) policy with RBS, of which NatWest is a group company. The action arose after NatWest notified Axa of potential claims under the PPL policy as a result of it being sued in the US by victims of Hamas suicide bombings in Israel alleging that a British charity, Interpal, was a fundraiser for Hamas and it had collected donations through NatWest bank accounts.

The case turned on the factual events surrounding the renewal of the policy. In 2002, Axa faxed a renewal indication to Marsh, acting as broker of RBS, which referred to a "Terrorism exclusion (wording to be agreed)". There was no evidence that this fax had been forwarded to RBS by Marsh, nor was it established that RBS or NatWest had knowledge of the fax's content.

The Court, finding in Axa's favour, considered that the terms set out in the fax reflected the basis on which Axa had offered renewal, subject to amendment by agreement. Such an amendment had not been shown in evidence. It was immaterial that RBS was unaware of the exclusion, as Marsh was under a duty to communicate renewal terms to its client in its capacity as duly authorised agent. Axa would reasonably have expected RBS to have been made aware of the exclusion.

Further, the terms of the exclusion were deemed sufficient, as the phrase "Terrorism exclusion" was capable of both interpretation and application. The Court concluded that no further wording was required to incorporate the term into the renewed PPL policy.

UK: Court of Appeal Reverses Key Aspects of High Court Judgment on the Treatment of Client Money in the Lehman Insolvency

Fri, 06 Aug 2010 08:57:33 GMT

In Lehman Brothers International (Europe)(in administration) v CRC Credit Fund Limited & Ors [2010] EWCA Civ 917 the Court of Appeal considered the first instance judgment of Mr Justice Briggs on the operation of the Client Money Rules (CASS) in relation to the insolvency of Lehman Brothers International (Europe)(LBIE). We have previously reported on the judgment of Briggs J here and here.

The Court of Appeal agreed with Briggs J that the CASS rules created a trust over client money from the date it was received, rather than from the date it was segregated. It also agreed that LBIE did not hold client money for the purposes of the CASS rules simply because LBIE owed a certain sum to its client under an agreement, for example an obligation to pay a manufactured dividend under a stock lending agreement.

However, the Court of Appeal disagreed with the first instance judgment on two key issues. First, it was held that the trust imposed by CASS 7 applied to money which was identifiably client money whether or not it had actually been segregated by LBIE. It would be unfair for the trust to apply only to those clients whose money happened to have been be placed in segregated accounts. Second, the Court of Appeal held that the effect of CASS 7 was that clients would share in the client money pool according to the amount which ought to have been segregated on their behalf, rather than (as held by Briggs J) on the basis of the sum which had in fact been segregated.

This judgment is highly significant, as it will significantly increase the number of creditors who may be entitled to make claims for client money held by LBIE and possibly the amount of their claims. Creditors whose client money was not segregated by LBIE, but ought to have been, may now have a claim to the pool of client money held by LBIE. It is unlikely, however, that the decision will increase the size of the pool because it does not turn the money in LBIE's house accounts into trust money (and therefore client money) except to the extent that tracing rights can be established over such funds. This would prima facie seem unlikely. Except to that extent, the decision will diminish the share of those whose client money was in fact segregated. Given the material impact this decision could have on the distribution of funds by the administrators of LBIE (although it should be noted that the decision depends heavily on the meaning and interpretation of CASS and should not be taken to apply to trust rights in a non-CASS context), it seems likely that there will be an appeal to the Supreme Court."

New Senate Bill Introduced That Will Expand Authority of The Federal Trade Commission to Monitor Insurers

Thu, 05 Aug 2010 15:11:19 GMT

On August 2, 2010, United States Senators Mark Pryor (Ark.-D) and John D. Rockefeller IV (W.V.-D) introduced the Insurance Competition and Transparency Act of 2010 (S. 3685), which will remove restrictions on the Federal Trade Commission’s (the “FTC”) authority to review market activity in the insurance industry. S. 3685 was referred to the Senate Commerce, Science and Transportation Subcommittee on Consumer Protection, Product Safety and Insurance.

According to the senators’ press releases, if passed into law, S. 3685 will allow the FTC to “investigate and disclose information about practices employed by insurance companies that may reduce competition in the marketplace.” Senator Rockefeller has stated that S. 3685 “will complement the recently passed comprehensive health reform law by helping to make sure affordable, comprehensive health insurance options are available to all of our hardworking . . . American families.” Similar legislation was proposed earlier this year, but failed to make it into the final healthcare reform bill as discussed here, here, and here.

Notwithstanding the McCarran–Ferguson Act (15 U.S.C. §§ 1011-1015), the Insurance Competition and Transparency Act of 2010 would “give the FTC the freedom to conduct studies, prepare reports, and release information relating to insurance companies without first receiving a written request from the Senate Commerce or House Energy and Commerce Committees.”

Specifically, S. 3685 strikes the following subsection (l) from Section 6 of the Federal Trade Commissions Act (15 U.S.C. § 46):

Nothing in this section (other than the provisions of clause (c) and clause (d)) shall apply to the business of insurance, except that the Commission shall have authority to conduct studies and prepare reports relating to the business of insurance. The Commission may exercise such authority only upon receiving a request which is agreed to by a majority of the members of the Committee on Commerce, Science, and Transportation of the Senate or the Committee on Energy and Commerce of the House of Representatives. The authority to conduct any such study shall expire at the end of the Congress during which the request for such study was made

and replaces it with:

Notwithstanding the Act of March 9, 1945 (15 U.S.C. 1011 et seq.) and the definition of corporation in section 4, the Commission may use the authority described in this section to conduct studies, prepare reports, and disclose information relating to insurance, without regard to whether the subject of the study, report, or the information is for-profit or not-for-profit.

Subject to the Act of March 9, 1945 (15 U.S.C. 1011 et seq.) and notwithstanding the definition of corporation in section 4, the provisions of this Act shall apply to an insurer without regard to whether such insurer is for-profit or not-for-profit. For purposes of this paragraph, an employer or membership organization not organized for its own profit or that of its members that provides health care or medical malpractice benefits only to its employees or members shall not be deemed to be a health insurer or a medical malpractice insurer, provided that this exclusion shall not apply to a separate entity that issues insurance or to an organization whose sole or primary membership benefit is insurance.

We will continue to monitor this development here at InsureReinsure.

Argentina: Insurance Premiums Up 8.8% in 12 Months to June 2010

Thu, 05 Aug 2010 11:12:35 GMT

Insurance premiums in Argentina rose 8.8% to 36.12 billion pesos (US$ 9.2 billion) in the 12 months to the end of June, the Argentine insurance superintendency (SSN) has reported. The total in June 2010 was 3.12 billion pesos (US$ 793 million), an increase of 5.9% from May and 16.5% from June 2009.

The SSN said June's total premium figure was dominated by property and casualty premiums of 2.51 billion pesos (US$ 638 million), which were up 5.8% compared with May. Life insurance premiums were 561 million pesos (US$ 143 million) and retirement insurance premiums were 52.8 million (US$ 13.4 million), up 6.6% and 4.9% respectively compared with the previous month.

The year over year increase in total premiums is positive news for the Argentine insurance market, which had seen stagnation and even regression in total premiums over the past few years.

If you would be interested in learning more about the Argentine and/or other Latin American (re)insurance markets and/or regulatory environments, please click the “Email the Editor” button and provide your contact information for follow-up by an EAPD attorney.

UK: Application for Extension of Time is Barred by the Court of Appeal

Thu, 05 Aug 2010 10:04:12 GMT

The Court of Appeal, in City & General (Holborn) Ltd v Royal Sun Alliance Plc [2010] EWCA Civ 911, was asked to consider whether the earlier decision to set aside an extension of time for service of a claim form (granted due to the claim being time-barred) was correct. The claim bought by City & General (C&G) was in respect of damage suffered to a building in London as a result of flooding which started in April 2002, the collapse of a crane on an adjoining site in January 2003, and the infestation of the building's water systems by bacteria which was discovered in May 2004. The claim form was issued on 16 January 2009 but not served within the four month deadline which expired on 17 May 2009. Following an application for extension of time, it was finally served on 15 June 2009, and the extension was then set aside in August 2009 following an application by Royal Sun Alliance (RSA).

On appeal, C&G argued that: (i) in respect of the first ground of appeal, the First Instance judge should have considered the three claims separately and come to a time-bar conclusion in respect of each; (ii) each time more water entered the site it caused fresh damage and therefore each time was a new cause of action; and (iii) the fact that RSA had made an offer of compensation for the water damage in March 2007 meant that it had acknowledged the claim so that the limitation period started again at that time under s.29(5)(a) Limitation Act 1980.

The Court of Appeal found against C&G on all counts as follows: (i) C&G had not asked the judge to consider the extension of time under this basis, and in fact both parties had contended for an "all or nothing" approach. Lord Justice Longmore, giving the leading judgment, stated that, in any event, it is sufficient for a defendant to show that he would be deprived of the time-bar defence if service of the claim form was extended; (ii) in respect of the second ground, none of the relevant case law had been to the judge's attention. As such, the judge was not purporting to be ruling on this point, and indeed it would have been wrong for him to do so in an application for extension of time for service; (iii) in respect of the third ground of appeal, which was a wholly new point raised by C&G, the offers made by RSA were extremely small compared to the value of the claim for damages and as such could not be taken to be an admission of liability. Further, their Lord Justices noted the considerable case law which states that claims under a policy of indemnity are claims for unliquidated damages. As such, the provision in s.29(5) Limitation Act 1980 which only applies to "debts or liquidated pecuniary damages" would not apply.

Ninth Circuit Reverses District Court’s Vacatur of Arbitration Award

Thu, 05 Aug 2010 09:59:00 GMT

Zev Lagstein, M.D. filed a claim for benefits under a disability policy issued by Certain Underwriters at Lloyd’s London (“Lloyd’s”) after he developed heart disease and other ailments. After Lloyd’s failed to pay out on Lagstein’s claim, he brought suit in federal court, which was stayed pending arbitration. A three-member arbitration panel ultimately found in favor of Lagstein, awarding him the full amount of benefits under the disability policy, plus punitive damages and damages for emotional distress.

Lloyd’s then moved in the U.S. District Court for the District of Nevada to vacate the panel’s award. The District Court vacated the arbitration award on the grounds that it was excessive and not supported by the record, but rejected Lloyd’s argument that vacatur was warranted due to the arbitrators’ failure to disclose the fact that two of them had previously been involved in a judicial matter together.

On appeal, the U.S. Court of Appeals for the Ninth Circuit reversed the portion of the district court’s ruling that vacated the award. First, the Ninth Circuit found that, under Section 10 of the Federal Arbitration Act (“FAA”), the district court could not vacate the panel’s award merely because it believed the award’s size was excessive based on the record or disagreed with the panel’s interpretation of the underlying facts.

Next, the court found that the mere size of the panel’s award did not demonstrate manifest disregard of the law, as argued by Lloyd’s. Relying upon the U.S. Supreme Court’s recent decision in Stolt-Nielsen S.A. v. Animal Feeds Int’l Corp., 130 S. Ct. 1758 (2010), and Ninth Circuit precedent, the court noted that Lloyd’s failed to point to any controlling law or legally dispositive fact that the panel overlooked in rendering its decision and award.

Last, the Ninth Circuit noted that, even if the district court disagreed with the panel’s construction of the Lloyd’s disability policy, that was not a sufficient basis for vacatur. So long as the award “drew its essence” from the Lloyd’s policy, which the court found to be the case, it should not have been disturbed.

The Ninth Circuit also affirmed the district court’s ruling that the award should not be vacated due to evident partiality on the part of the arbitrators. The court found that the undisclosed fact that one arbitrator previously served as a judge in an ethics proceeding involving another arbitrator was not evidence of bias towards Lagstein or against Lloyd’s.

Click here to review the Ninth Circuit’s decision.

Legislation Introduced into the House that Mandates Certain Disclosures to Beneficiaries of Life Insurance for Military Personnel

Wed, 04 Aug 2010 13:54:48 GMT

On the heels of an investigation by the Attorney General of New York Andrew Cuomo regarding the use of retained asset accounts^[1] by life insurers, United States House Representative Deborah Halvorson (Ill.-D) recently introduced legislation that would require, among other things, beneficiaries of the Servicemembers’ Group Life Insurance program to receive financial counseling and disclosure information regarding life insurance payments. Such disclosure would include telling beneficiaries how much interest the retained asset account will accrue and how much the insurer expects to earn from the funds in the account. The legislation would also require the Department of Veterans Affairs to provide an annual report to Congress to “ensure that insurance companies are being responsive to military families.”

The legislation, called the Securing America’s Veterans Insurance Needs and Goals (“SAVINGS”) Act of 2010 (H.R. 5993), was referred to the House Committee on Veteran’s Affairs on July 30, 2010. Co-sponsors of the SAVINGS Act include committee chairman Bob Filner (Calif-D). Media sources have indicated that congressional hearings regarding the bill may be held as soon as September, after House members return from their August recess.

In related news, United States Senator Charles Schumer (N.Y.-D) has announced that he is drafting legislation that would require life insurers providing military life insurance to offer beneficiaries an option to receive a lump-sum payment of benefits. Senator Schumer, along with nine other Senate colleagues, sent a letter to Secretary Eric Shinseki of the Department of Veterans Affairs urging him to “take action to stop insurance companies from profiting off benefits owed to the families of service members who died in service to our country.”

We will continue to monitor developments relating to the use of retained asset accounts here at InsureReinsure.

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^[1] A retained asset account is a benefit payment option designed to be a temporary repository of funds while the beneficiary considers the available options. Beneficiaries are provided a check book, from which they can access the life insurance proceeds, even doing so with one check for the entire amount. Some insurers provide beneficiaries with a checking account, while other provide a draft account. These accounts accrue interest. Periodic account statements are provided to the beneficiary. As with the beneficiaries of civilians, retained asset accounts are provided to the beneficiaries of fallen soldiers under the Servicemembers’ Group Life Insurance program.

Federal Court Finds that Fraud Claim is not Arbitrable

Wed, 04 Aug 2010 13:50:41 GMT

In a decision by the United States District Court for the Southern District of New York, AXA Versicherung AG v. New Hampshire Ins. Co., 05 Civ. 10180 (JSR) (S.D.N.Y. 2010), the court held that certain fraud claims were not a matter of contract interpretation and, therefore, not arbitrable under a provision in a facultative reinsurance agreement that provided for arbitration of disputes “arising out of the interpretation of this agreement.”

The lawsuit was brought by AXA Versicherung AG (“AXA”), the successor in interest to Albingia Versicherung AG (“Albingia”) against three cedents. A jury rendered a verdict in AXA’s favor, finding that the cedents had fraudulently induced Albingia to enter into two reinsurance facilities. The cedents appealed, and the Second Circuit remanded the case to the District Court to make certain findings in relation to whether the claims brought by AXA should have been sent to arbitration (the District Court had previously denied the cedents’ request for a stay, but the Second Circuit found that its reasons for doing so were not clear based on the record). The court concluded that AXA’s fraudulent inducement claim sounded in fraud and that, even if New York law would treat those allegations as duplicative of a contract claim, the court would still find that the claim was not within the scope of the arbitration clause because it did not “arise out of the interpretation” of the contract. Noting that the parties were free to limit the issues they chose to arbitrate, the court explained that arbitration clauses limited to disputes arising out of the “interpretation” of the contract are widely understood to cover only those disputes that can be resolved by reference to the terms of the contract.

The court also found that the cedents had knowingly and intentionally waived their right to arbitrate by not pursuing arbitration at the outset of the case. Instead, the cedents raised that argument in their summary judgment motion and motions in limine in what the court described as “a strategic gambit meant to provide a second bite at the apple in the event that [the cedents] lost in this Court.”

Click here to review a copy of the court’s decision.

Last Call -- Please Join the U.S. Reinsurance Under 40s Group at its Summer Happy Hour

Wed, 04 Aug 2010 13:37:37 GMT

As a reminder, please join the U.S. Reinsurance Under 40s Group tomorrow, August 5th, at its Summer Social Event. The event will take place at Bourbon Street Bar and Grille and begin at 6:00 pm. For more information and to RSVP, please click here.

If you would like to learn more about the Under 40s Group, you can visit the Group's website or contact Brian Green or Rob DiUbaldo, who are both on the Group's board.

New York Attorney General Office Broadens its Probe into the Life Insurance Industry’s Use of Retained Asset Accounts; Class Action Lawsuit Against Life Insurer Filed

Wed, 04 Aug 2010 10:27:46 GMT

As mentioned in our prior post, New York Attorney General Andrew Cuomo has begun an investigation into the alleged misuse of retained asset accounts by life insurance companies. This probe started with two of the largest life insurers and has now been widened to include six more. The latest subpoenas were sent on Friday, July 30th.

According to the Attorney General’s website, his office has “begun a comprehensive review of the life insurance industry and its practices to determine the extent to which other companies are engaged in these or any other similar fraudulent practices.”

In other news, a class action law suit was filed in the U.S. District Court for the District of Massachusetts, Western Division, on behalf of the beneficiaries of the Servicemembers Group Life Insurance program, the Veterans’ Group Life Insurance program, and the Traumatic Injury Protection program against the life insurer that administers those three programs. Similar to Attorney General Cuomo’s allegations, the class action filing alleges that the program administrator held onto the death benefit funds after they were due to the beneficiaries in order to earn a return on those funds that was substantially larger than that paid to the beneficiaries over the same time period. The complaint alleges that beneficiaries of these programs have a right of action against the program administrator “to collect on profits generated by the [benefit funds] between the time of the . . . death or traumatic injury of the [insured] and the time at which the full benefits are finally delivered to the beneficiaries.”

We will continue to monitor developments relating to the use of retained asset accounts here at InsureReinsure.

Chinese Drywall – Louisiana Legislature Bans Policy Cancellations and Non-Renewals Based upon Drywall Claims

Tue, 03 Aug 2010 12:58:05 GMT

Louisiana Governor Bobby Jindal signed legislation that bans insurers from cancelling or non-renewing homeowners insurance coverage when a policyholder files a claim based on Chinese Manufactured drywall. As previously reported here, Louisiana state Senate Bill, SB 595, was sponsored by State Senator Julie Quinn (R-Metairie) and unanimously passed the Louisiana Senate on April 26, 2010.

The new law only applies to residential properties, permits insurers to increase premiums on the policies of those who file drywall claims, and permits companies to cancel or non-renew a policy if factors other than drywall are also present. The fine for violation of the act is $15,000 and the legislation is scheduled to sunset on July 1, 2013.

For more information see here.

SEC Calls for New Limits on Use of 12b-1 Distribution Fee Provisions in the Mutual Funds of Variable Annuity Subaccounts

Tue, 03 Aug 2010 12:53:10 GMT

The U.S. Securities and Exchange Commission (“SEC”) has recently proposed regulations that would limit fund sales charges and increase disclosure requirements under Rule 12b-1. Rule 12b-1, adopted under the Investment Company Act of 1940, permits mutual funds to use a portion of fund assets to pay for the cost of promoting sales of fund shares, effectively eliminating sales load charges.

To better reflect the premium investors place on the various services provided by broker-dealers, insurance companies, and other intermediaries, the proposal would allow fund managers to offer classes of shares that could be sold with sales charges set at competitively-established prices. For those shares, the SEC would provide relief from restrictions that currently limit retail price competition for distribution services. However, this might be difficult for some insurers due to the fact that variable annuity funds generally do not contain contingent deferred sales loads.

The SEC is seeking comments by November 5, 2010 about whether it should treat variable annuity funds differently from other funds.

For more information, see the full text of the SEC’s proposal here.

Massachusetts Passes Autism Coverage Legislation

Tue, 03 Aug 2010 12:46:19 GMT

Last week, the Massachusetts legislature passed House Bill No. 4935, An Act relative to insurance coverage for autism ("H. 4935"), which requires that benefits be provided on a nondiscriminatory basis for the diagnosis and treatment of Autism Spectrum Disorders. H. 4935 prohibits dollar or unit of service limitations on coverage for the diagnosis and treatment of autism that are lower than dollar or unit of service limitations applicable to the diagnosis and treatment of physical conditions.

Autism services provided by school personnel pursuant to an individualized education program are not subject to reimbursement under H. 4935. In addition, insurers may be exempt from covering the habilitative and rehabilitative care required under H. 4935 if (i) the cost of such care would exceed 1% of the premiums charged by the insurer, and (ii) the cost of such care would lead to an increase in average premiums charged of more that 1% for all insurance policies.

H. 4935 is awaiting signature by Governer Patrick and, if signed, would make Massachusetts the 23rd state to enact such legislation. For the complete text of H. 4935, click here.

China: The China Insurance Regulatory Commission Proposes to Lift Interest Rate Cap

Tue, 03 Aug 2010 12:40:20 GMT

On 11 July 2010 the China Regulatory Commission (the CIRC) stated that it proposed to remove restrictions on insurance companies in China in deciding the assumed (or guaranteed) interest rates for "conventional" (non-participating) life insurance policies in order to protect consumers' interests and encourage innovation in the sector. The CIRC hopes that this deregulation will help to boost sales in conventional insurance policies, which have been in decline for a number of years.

At present the interest rate that may be paid under a conventional life insurance policy is capped at 2.5%. The initial cap was introduced by the CIRC in 1999 when fierce competition drove insurance companies to pay increased returns (that is increased interest rates) to policyholders exceeding the yields that could be obtained on other investments. "Conventional" life insurance policies are life insurance policies with premiums and policyholder benefits already determined at the time the policies are written. Market analysts are of the opinion that deregulation of interest rates will bring greater competition to the sector, although it will reduce the profit margin on conventional life insurance policies as the higher interest rates set by investors will inevitably reduce their profit from those policies.

Following the CIRC's announcement, the value of shares in Chinese life insurers fell dramatically. However, a Citibank report indicated that negative impact on life insurers would be modest as conventional life insurance policies no longer constitute their main product.

A final decision has still to be made by the CIRC regarding the lifting of the cap on interest rates for conventional life insurance policies, although it is anticipated that the CIRC will ultimately implement the change.

Multiple Peril Insurance Act Stalls In House While Compromise Bill Introduced In Senate

Tue, 03 Aug 2010 09:23:59 GMT

This updates our July 23, 2010 posting.

Rep. Gene Taylor’s (D.-Miss.) Multiple Peril Insurance Act (H.R. 1264) failed to reach a floor vote prior to U.S. House of Representatives’ month-long recess that began this week. H.R. 1264 would expand the National Flood Insurance Program (“NFIP”) to cover windstorm insurance. The measure will not be picked up again until the House reconvenes in September.

Meanwhile, Sen. Roger Wicker (R.-Miss.) introduced the Coordination of Wind and Flood Perils Act of 2010 (S. 3672) to the U.S. Senate on July 29, 2010, which would place the burden of flood and wind loss allocations on insurers and the NFIP. Under S. 3672, if there is a dispute regarding whether a claim is wind or water, the policyholder would immediately receive the full value of the claim, half from the insurer and half from the NFIP. The insurer and NFIP would then proceed to arbitration to settle the dispute should they be unable to agree on the allocation following payment to the policyholder. S. 3672 has been referred to the Committee on Banking, Housing, and Urban Affairs.

Click here for a copy of S. 3672.

We will continue to follow this issue and provide further updates on InsureReinsure.com.

UK: Competition Commission Consults on Changes to the Way Retail Payment Protection Insurance is Sold

Mon, 02 Aug 2010 14:07:01 GMT

On 29 July 2010, the Competition Commission published for consultation its provisional decision on remedies in relation to retail payment protection insurance (PPI). Please click here to view the decision. This follows the Competition Commission's reconsideration of its decision to impose a prohibition on selling PPI at the credit point of sale (the point of sale prohibition (POSP)) following remittal of certain issues by the Competition Appeal Tribunal. Please click here to view our previous blog on this issue.

The Competition Commission has provisionally concluded, on the basis of new evidence (including a customer survey), that it would no longer be effective or proportionate to impose the POSP remedy in relation to retail PPI. The Competition Commission has also provisionally decided to impose a remedies package that includes:

1. obligations to 'unbundle' retail PPI from merchandise cover;
2. to provide certain standard information, personal quotes and annual reminders and reviews to consumers;
3. a requirement for providers to supply information to the new Consumer Financial Education Body for its price comparison tables; and
4. to prohibit the sale of single-premium PPI policies.

The Competition Commission invites comments in writing by 3 September 2010 and hopes to announce its final decision in relation to all PPI products during September 2010.

To view other blogs relating to PPI, please click here and here.

Life Insurer Use of Retained Asset Accounts Under Fire by State Attorneys General

Mon, 02 Aug 2010 11:12:55 GMT

Spurred by media reports alleging deception by some life insurers in their use of retained asset accounts^[1] for disbursing death benefits to the beneficiaries of fallen United States military personnel and the apparent lack of oversight by federal and state regulators, New York Attorney General, and gubernatorial hopeful, Andrew Cuomo has issued subpoenas to leading life insurers regarding their alleged “reaping [of] hundreds of millions in secret profits while misleading families into putting benefits into insurer controlled, low yield, potentially risky accounts.”

Attorney General Cuomo’s Investigation

Attorney General Cuomo has stated that it is “shocking and plain wrong for these multi-national life insurance companies to pocket hundreds of millions in profits that really belong to those who have lost family members and have already suffered immensely.” The Attorney General’s statement alleges that insurers reportedly earn upwards of 4.8% on the funds held in retained asset accounts, but pay surviving family members as little as 0.5% interest, "less than half the rate available at some Federal Deposit Insurance Corporation (the “FDIC”) insured banks."^[2]

Further, according to the Attorney General Cuomo, life insurers are not adequately informing beneficiaries “of the details of these accounts including the fact that the insurers are making huge profits at the expense of the grieving family.” According to the Attorney General’s statement, “insurers do not put the cash owed to families in banks insured by the FDIC, but instead in the insurer's corporate account [where they] may be subject to the insurer’s creditors.”

The subpoenas request a wide-range items, “including but not limited to the production of information relating to how and when beneficiaries are informed of the terms and conditions relating to the retained-asset accounts, as well as data relating to the difference between interest earned by the insurance companies and interest earned by the beneficiaries.”

While one of the two insurers subpoenaed administers the Servicemembers’ Group Life Insurance program and the other runs the group life program for federal civilian employees, Attorney General Cuomo has stated that “entire life insurance industry is under investigation for the practice.”

Connecticut

Connecticut Attorney General, and senate hopeful, Richard Blumenthal has urged regulatory action by the Connecticut Insurance Department Commissioner Thomas Sullivan to “stop misleading and deceptive practices by life insurance providers that may have deprived families -- including military families -- of potential benefit income.”

Attorney General Blumenthal sent a letter to Commissioner Sullivan stating that life insurers appear to be “failing to make prompt full payment to beneficiaries on life insurance policies upon the death of the insured party.” The Attorney General’s letter points out that the retained asset account “checkbooks” are not bank checks nor are the “funds being held in a federally insured depository, as a consumer would expect.” Further, the letter alleges that “If consumers clearly understood that these funds were being held in uninsured accounts, and that consumers were almost certainly receiving lower interest rates than they could receive in federally insured bank accounts, no rational consumers would accept this arrangement.” The letter’s argument then proceeds with the conclusion that “it seems obvious that beneficiaries are not receiving adequate disclosure to make sound decisions.”

While not committing to any legal action, Attorney General Blumenthal offered his support to Commissioner Sullivan to “attack[ ] and remedy[ ] this unconscionable practice” by either initiating regulatory action to bar the use of retained asset accounts or lobbying for legislation that would do the same.

Industry Response

In response, the American Council of Life Insurers (the “ACLI”) has come out in support of life insurers’ use of retained asset accounts as a way to provide “a significant benefit to family members who are dealing with the emotional loss of a loved one.” Further, the ACLI contends that the retained asset accounts are secure as they are regulated and backed by the full strength and claims-paying ability of the life insurer. The National Association of Insurance Commissioners (the “NAIC”) has stated that the “accounts were initially created at the request of consumers to provide options for receiving benefits from a life insurance policy, and with proper disclosure, consumers have generally been happy with this flexibility.” The NAIC also announced that it will be “re-reviewing [its model] disclosure requirements associated with [retained asset accounts] and is developing a consumer alert to help policyholders better understand the terms of these kinds of settlements.”

Other Responses

The Department of Veteran Affairs has announced that it is conducting a full investigation into the use of retained asset accounts. According to media sources, Defense Secretary Robert Gates has also pledged the Pentagon’s support with the probe.

United States House Representative Bob Filner (D-Calif.), chairman of the House Veterans Affairs’ Committee, has stated that he is not pleased with the news that life insurers are profiting from deaths of service men and women at the expense of their beneficiaries. An investigation or hearings by the House Veterans Affairs’ Committee regarding the use of retained asset accounts for the Servicemembers’ Group Life Insurance program is expected.

We will continue to monitor developments relating to the use of retained asset accounts here at InsureReinsure.

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^[1] Under many state insurance laws, an insurer must offer a beneficiary a lump-sum payment option consisting of the full amount of the life insurance proceeds in accordance with the terms of the life insurance contract. Insurers are also allowed to offer other benefit payment options as well such as a retained asset account. A retained asset account is designed to be a temporary repository of funds while the beneficiary considers the available options.

Beneficiaries are provided a check book, from which they can access the life insurance proceeds, even doing so with one check for the entire amount. Some insurers provide beneficiaries with a checking account, while other provide a draft account. These accounts accrue interest. Periodic account statements are provided to the beneficiary.

As with the beneficiaries of civilians, retained asset accounts are provided to the beneficiaries of fallen soldiers under the Servicemembers’ Group Life Insurance program.

^[2] Opponents cited in the recent media reports point to the large spread between the relatively high returns enjoyed by life insurers on cash held in retained asset accounts and the low interest rates paid to the beneficiaries. They state this is unfair given the retained asset accounts are typically not insured by the FDIC, which insures deposit accounts up to $250,000. Critics also allege that these facts are not properly disclosed to beneficiaries and that the death benefits are typically held in the insurer’s general fund rather than disbursed to the beneficiaries or a third-party intermediary, such as a FDIC-insured bank.

Further, the media reports highlight statements made by various state insurance regulators that retained asset accounts are FDIC insured, pointing to a lack of understanding by those charged with protecting the interests of insureds and beneficiaries. The media reports also include information gleaned from a representative from the Department of Veteran Affairs who wrongly declared that the funds in retained asset account went into a bank, not the insurance company’s general fund, and that no profit is generated from those accounts.

Michigan Supreme Court Upholds Credit Scoring for Personal Lines Insurance

Mon, 02 Aug 2010 09:05:15 GMT

In July, the Michigan Supreme Court ruled that a five-year-old set of regulations promulgated by the Michigan Office of Insurance and Financial Regulation (the "OIFR") banning the use of credit scores in setting personal insurance premiums was an over extension of the insurance regulator’s statutory authority. In its 4-3 decision, the court also determined that the use of credit scores does not violate the Michigan Insurance Code. This decision brings an end to the OIFR’s attempt to ban a controversial practice it deems discriminatory to racial minorities and the economically disadvantaged by overturning a 2008 appellate court ruling.

Insurance industry representatives say that the decision will lower rates for Michigan motorists, since credit scoring allows for discounts to drivers with pristine credit scores. Opponents claim that statistical data shows credit scoring merely shifts the costs of auto insurance from those with high credit scores to those with lower scores, such as recently laid-off workers. Further, critics contend that information gleaned from credit reports, such as high credit card balances and late payments, have little bearing, if any, on a motorist’s driving ability.

Michigan State Representative Shanelle Jackson (D-Detroit) has been quoted as stating that it is now up to the state legislature to pass legislation to ban the use of credit scores. A current bill banning the use of credit scores in setting auto insurance premiums, sponsored by Representative Woodrow Stanely (D-Flint), passed the Michigan House last year and has been referred for consideration to the Michigan Senate Committee on Economic Development and Regulatory Reform.

We will continue to monitor developments relating to credit scoring here at InsureReinsure.

NAIC Releases RFP to Produce Designations for Commercial Mortgage-Backed Securities

Mon, 02 Aug 2010 08:55:43 GMT

The NAIC is seeking proposals for a vendor to model expected losses on approximately 7,500 commercial mortgage-backed securities (CMBS) as of December 31, 2010, according to a news release issued by the NAIC July 28, 2010. The expected losses will determine NAIC designations used by insurers to calculate the solvency reserves needed to cover their CMBS holdings.

The NAIC used a similar method to establish NAIC designations for residential mortgage-backed securities at the end of 2009. In March 2010, the NAIC Financial Condition Committee adopted a recommendation to model CMBS at the end of 2010. According to the news release, the recommendation is expected to be adopted during the upcoming Summer National Meeting in Seattle.

Responses to the RFP are due August 11th, and a vendor is anticipated to be selected by September 3rd.

To view the news release, click here. To view the RFP, click here.

Bono’s Back Injury is Underwriters’ $18 Million Pain

Mon, 02 Aug 2010 08:24:07 GMT

Britain’s The Sun reports that Robertson Taylor – music industry broker for Lloyd’s of London – is reportedly handling a claim of approximately $18 million for the now infamous back injury incurred by U2’s front man Bono during U.S. tour rehearsals. Bono required emergency surgery, and U2 had to subsequently postpone their U.S. summer tour and cancel their headlining appearance at the Glastonbury Festival. Along with Bono’s pain and suffering from the bodily injury claim, there may also be a separate claim for cancellation and non-appearance insurance coverage for lost tour revenue estimated to be in the tens of millions of dollars. Indeed, U2’s insurers may soon too be feeling the pain.

A Consensus Emerges on Iranian Sanctions: Compliance May be Easier for Global Insurers

Fri, 30 Jul 2010 13:55:07 GMT

The enactment of the Comprehensive Iran Sanctions, Accountability and Divestment Act of 2009 (the “Iran Sanctions Act”), signed by President Obama in the first week of July, threatened the status quo regarding the insurance and reinsurance by international insurance firms of risks relating to the Iranian petroleum industry, including cargos of oil and petrochemical equipment. Signals that the current US administration was seeking to aggressively implement the extraterritorial reach of its new sanctions regime against foreign banks and insurers with U.S. affiliates raised the heat on reinsurers and insurers, particularly those with investments in and commitments to the US market, to comply with the Iran Sanctions Act in their wholly-offshore affiliates and businesses.

The adoption of the Iran Sanctions Act followed the failure of the Security Council to significantly expand the UN’s Iranian sanctions regime beyond the nation’s nuclear industry and possible efforts to build a nuclear bomb. A link to the Security Council’s June 9, 2010 resolution is here.

The Iranian Sanctions Act calls for the U.S. Secretary of the Treasury to adopt regulations under the Act within 90 days. The Treasury Department’s Office of Foreign Asset Control (“OFAC”) has not to date adopted any new regulations as to Iranian sanctions. Developments can be monitored on the OFAC’s website.

As we noted in an earlier blog, reportedly the Iran Sanctions Act has already impacted Iran’s oil industry because cargos have become difficult to insure. While many leading international insurance companies have refused to comment, others have expressed concern about the impact of the law on existing insurance contracts and some, such as Lloyd’s, have indicated an intention to comply, perhaps because of the more aggressive US posture towards financial services firms.

On Monday, July 26, 2010, U.S. Secretary of State Clinton and Secretary of Treasury Geithner announced agreements had been reached with Canada and the European Union on tougher Iranian sanctions. See their joint statement here. The Council of the European Union adopted more restrictive sanctions against Iran in a Council Decision of the same date. See its decision here.

Notably, the EU imposed sanctions on Iran’s oil industry that parallel to a significant degree restrictions found in the Iranian Sanctions Act, including prohibiting insurance or reinsurance of Iranian entities, individuals or entities acting on their behalf or entities controlled by them and providing for the freezing of assets.

Australian Foreign Minister, Stephen Smith, announced on August 29, 2010 that Australia will impose an Iranian sanctions regime similar to the EU sanctions discussed above. See the Foreign Minister’s press release here.

These latest developments have addressed worrisome inconsistencies among US, Canadian, Australian and EU Iranian sanctions. It remains to be seen, however, if the new regulations OFAC issues will re-open old issues or create new problems. For the time being Australian, Canadian and European insurers and reinsurers with major US businesses and dealings with Iran will have a legal framework in their home jurisdictions providing authority and support for their compliance with the US-led approach to sanctions, the adequacy of which will bear revisiting once OFAC acts.

We will continue to monitor and report on Iranian sanctions and their impact on the global insurance industry.

UK: English High Court Refuses to Stay English Proceedings in Favour of the Florida Courts

Fri, 30 Jul 2010 13:52:48 GMT

In the matter of Royal & Sun Alliance Insurance Plc and others v Rolls-Royce Plc [2010] EWHC 1869 (Comm), which arose from parallel proceedings being pursued in England and Florida, the Court made clear that English proceedings will not be stayed in such instances unless it is shown that the foreign court is clearly the most appropriate forum.

Following the technical failure of its 'Mermaid Pod' marine propulsion system, and the commencement of litigation in the Florida courts, Rolls-Royce made settlements in excess of $100m to several cruise ship operators. On notification of the claim by Rolls-Royce's brokers, Marsh UK Ltd, the insurers indicated that they would not meet the claim, prompting Rolls-Royce to commence proceedings in the Southern District of Florida. Prior to service of the Florida proceedings, parallel proceedings were filed by the insurers in the English courts and served on Rolls-Royce at its UK registered office. The insurance policies were expressly subject to English law but did not contain an exclusive jurisdiction clause.

Rolls-Royce applied to the High Court for a stay of the English proceedings, an application which was ultimately refused. The Court recognised that proper service had been made in England and so it had jurisdiction. The burden was therefore on Rolls-Royce to prove that Florida was clearly the appropriate forum for the dispute. This was a burden which Rolls-Royce failed to discharge.

On considering the factual issues relevant to the dispute, the Court decided that England was the more appropriate forum. Whilst accepting that Rolls-Royce staff and legal advisers had accumulated knowledge and expertise on the matter in Florida, the Court characterised this as a dispute between an English insured and (predominantly) English insurers under policies whose governing law was English and which was placed in London. For this reason, the application for a stay was rejected.

UK: Equitable Life (Payments) Bill Receives First Reading in House of Commons

Fri, 30 Jul 2010 13:48:43 GMT

We have previously reported here and here on the long-running saga following the demise of Equitable Life. The latest chapter is the Equitable Life (Payments) Bill which received its first reading in the House of Commons on 22 July 2010. The Bill is intended to allow the Treasury to provide finance for payments to be made in cases where persons have been adversely affected by the Government's maladministration in the regulation of Equitable Life Assurance Society (Equitable Life) in the period before 1 December 2001.

As previously reported here, the previous UK Government asked Sir John Chadwick, a former Court of Appeal Judge, to advise the Treasury on issues relating to the determination of relative losses suffered by Equitable Life policy holders and the impact of those losses. Sir John Chadwick issued his findings on 16 July 2010. Some of his findings are contentious; the Parliamentary Ombudsman herself having recently declared the proposals "unsound." Because of this, and the complexity of the methodology Sir John Chadwick has advocated in his report, the current Government has stated that it will reflect on his report and will listen to representations by interested parties ahead of the Autumn Spending Review.

The purpose of the Bill therefore is to enable the new Government to make "fair and transparent payments to Equitable Life policy holders through an independent payment scheme for their relative loss as a consequence of regulatory failure" as pledged in the Coalition Agreement of 11 May 2010. The Bill itself does not set out any figures; its function is to allow the Treasury to authorise any future payments. The Bill will have its second reading on 14 September 2010.

The Parliamentary Ombudsman Report can be found here.

Sir John Chadwick's report can be found here.

The Bill can be found here.

UK: Bribery Act 2010

Fri, 30 Jul 2010 10:14:36 GMT

The UK Ministry of Justice has announced that the Bribery Act will be implemented in April 2011, six months later than originally anticipated. The Bribery Act will introduce a comprehensive scheme of bribery offences in the private and public sectors, including the offences of bribery of a foreign public official and, in relation to commercial organisations, failing to prevent bribery. It will apply to bribes paid in the UK and overseas. Implementation will follow a consultation exercise on what will constitute adequate procedures to combat bribery. The Act requires the Government to publish guidelines on this subject, which it now plans to do in January 2011. EAPD's Guidance Note on the Bribery Act appears here.

UK/EU: Legal Expenses Insurance Must Comply with Insured's Freedom to Choose Lawyer Under EU Directive

Fri, 30 Jul 2010 09:18:50 GMT

On 19 July 2010, the FSA sent a letter to UK insurance firms reminding them of the requirement that terms in legal expenses insurance must not detract from, or qualify in any way, an insured's freedom to choose a lawyer.

This requirement is mandated by Council Directive 87/344/EEC on Legal Expenses Insurance (the Directive), as clarified by a ruling of the European Court of Justice on 10 September 2009 in the case of Erhard Eschig v UNIQA Sachversicherung AG. In this case the ECJ held that the Directive sought to facilitate resolution of disputes and protect the interests of the insured, by removing possible conflicts of interest and giving them the right to choose a representative. As a result, Article 4(1)(a) of the Directive was not to be interpreted as allowing the legal expenses insurer, in a class action, to choose the legal representative of all the insured persons involved.

Insurance firms should respond to the FSA by 30 September 2010 detailing what actions they have taken to ensure the terms of their legal expenses insurance policies comply with the Eschig ruling. Click here to view the FSA's letter.

Hong Kong: Yuan Liberalisation Boosts Insurers

Thu, 29 Jul 2010 10:31:26 GMT

On 20 July 2010, the Hong Kong Special Administrative Region and Beijing signed an historic agreement allowing Hong Kong to become the first yuan clearing centre outside mainland China. Asia Insurance Review reports that insurers and wealth management companies stand to gain from the agreement.

China Life Insurance (Overseas) Company Limited became the first insurance company to launch an insurance policy denominated in yuan. HSBC Insurance is allowing new customers of its WealthSave (Renminbi) Protection plan to pay their annual premiums in either yuan or Hong Kong dollars. Standard Chartered Bank will also shortly offer structured investment products for retail and wholesale clients in Hong Kong that will pay interest in yuan.

A potential long-term outcome of Hong Kong becoming a yuan clearing centre is that it may develop its own exchange and interest rates for the yuan as an offshore market, distinct from the market in mainland China.

New York State Court Denies Motion to Compel Discovery of Reinsurance and Reserve Information

Thu, 29 Jul 2010 10:27:41 GMT

In Mt. McKinley Ins. Co. v. Corning Inc., 2010 NY Slip Op 20235 (N.Y. Sup. Ct. June 14, 2010), an insured (“Corning”) moved to compel discovery of reinsurance and reserve information from its insurers, arguing that this information was relevant, material and necessary to its coverage claim. Specifically, Corning alleged that the reinsurance information sought could be relevant to the insurers’ liability for the asbestos claims at issue (including whether the insurers took inconsistent coverage positions with their reinsurers) and to rebut the insurers’ claims of late notice. As for information pertaining to the insurers’ reserves, Corning argued that it might illustrate when the insurers first became aware of the asbestos claims, which policies were triggered, how the limits of those policies applied, and whether the insurers were liable for the claims.

The court denied Corning’s request for reinsurance information, finding that it failed to offer any proof that such information was relevant to the coverage issues involved in the case, and that Corning’s discovery request was based upon mere speculation. Moreover, the court found that, under New York law, there is no per se rule requiring an insurer to produce its reinsurance agreements that might cover an underlying loss. Rather, an insurer’s obligation to produce this information is determined by the facts of a case and whether it is relevant (noting that the provisions of CPLR 3101(f) provide that a party “may” obtain discovery of the existence and contents of any insurance agreement).

The court also denied Corning’s motion to compel the insurers’ reserve information for the subject asbestos claims, distinguishing those cases in New York which have required an insurer to produce such information where its insured alleges bad faith. Because the dispute involved a disagreement over certain insurance coverage issues, but no allegations of bad faith, the court held that reserve information was likewise irrelevant.

Click here to review a copy of the court’s decision.

New York Insurance Department to Hold Hearing on August 20, 2010 on Whether to Expand the Export List Under Regulation 41

Wed, 28 Jul 2010 11:18:19 GMT

A public hearing on August 20, 2010 will explore the possibility of increasing insurance capacity in New York by easing access to unauthorized insurers. The New York State Insurance Department (“NYID”) is soliciting input from the public as it determines whether to revise eligible coverages on the Export List, as set forth in Insurance Department Regulation 41 (11 NYCRR 27).

Regulation 41 sets forth procedures for the placement of insurance by licensed excess line brokers with insurers not authorized to do business in New York. One requirement under the regulation is that the risk must be declined by three authorized insurers before a New York insurance risk can be placed with an unauthorized insurer. Under an amendment to Regulation 41, certain coverages may be placed by excess line brokers with unauthorized insurers without first having to obtain the three declinations. This list of coverages is generally referred to as the “Export List.”

For more information on the upcoming hearing, see the NYID’s press release by clicking here.

California Insurers Divest $400 Million in Iran-Related Assets

Wed, 28 Jul 2010 11:10:25 GMT

California Insurance Commissioner Steve Poizner announced on July 1, 2010 that insurers in his state had sold about 20% of the assets the industry holds in the 50 companies that the California Department of Insurance ("CDI") has identified as doing business with Iran's nuclear, energy and defense sectors. The sell-off took place in the first quarter of 2010. According to Commissioner Poizner: "In the weeks before my order to disqualify risky Iran-related investments from their books took effect, insurance companies sold hundreds of millions of dollars of investments in companies that prop up the oppressive Iranian government. This proves that insurance companies can do the right thing and make safe and profitable investments without having to resort to investing in companies that actively do business in rouge elements of the Iranian economy."

You can read the CDI's press release by clicking here.

Iran's Shipping Industry Suffers as Foreign Insurer's Withhold Coverage

Wed, 28 Jul 2010 10:47:24 GMT

According to a recent article in the Washington Post, "Tehran's ability to ship vital goods has been significantly curtailed as some of the world's most powerful Western insurance companies cut off Iranian shippers out of fear that they could run afoul of U.S. laws, the insurers say." In light of the U.S. sanctions against Iran which followed the U.N.'s set of sanctions, companies have become more hesitant to conduct business with their Iranian counterparts for fear of running afoul of the U.S. sanctions. According to the article, among the hardest hit sectors are "[d]ozens of Iranian vessels that transport crude oil, industrial equipment and other goods and supplies in and out of the Islamic Republic[, which] have been denied insurance coverage for weeks, insurance company representatives said."

The hardship posed by the lack of insurance for Iran's shipping sector has become even more acute because "most ports will refuse them entry if they are not covered for possible damages," says Mohammad Rounaghi, deputy manager of Sea Pars, an Iranian company that provides services for international ship owners and maritime insurance companies. The Iranian government hopes to side-step the impact of the lack of insurance by pledging to put up $1 billion to guarantee coverage, according to the Washington Post. The guarantee, however, may not sway foreign insurers to resume business with Tehran as the risk and cost of doing so seems too great, according to a Dutch insurer quoted in the Washington Post article.

You can access that Washington Post article by clicking here.

German Government Opposes US Legislation Limiting Deductibility of Reinsurance Premiums

Wed, 28 Jul 2010 10:41:39 GMT

Proposed legislation that would limit a tax deduction for reinsurance premiums paid to a foreign affiliate of a US insurer has drawn the formal opposition of the German government. Ambassador Klaus Scharioth, in a recent letter to House Ways and Means Chairman Sander Levin (D-MI), said that the so-called Neal Bill (HR 3424) “goes well beyond” the undisputed goal of combatting tax avoidance and evasion and, as a result, conflicts with provisions of the German-US tax treaty.

US Representative Richard Neal (D-MA) introduced HR 3424 in July 2009. It would prevent US-based insurers from taking a tax deduction for reinsurance premiums paid to a non-US affiliate, to the extent that the premium charged exceeds the industry average premium for third-party reinsurance. A copy of the Neal Bill can be found here. We previously blogged about the Neal Bill here and here.

The German government’s letter noted that the proposed legislation would not affect the deductibility of premiums paid by a US-based insurer to an affiliated reinsurer domiciled in the United States. As a result, the ambassador wrote, the legislation violates a prohibition on discrimination contained in the tax treaty. According to the letter, the legislation would also violate the arm’s-length principle incorporated into the treaty, as well as various World Trade Organization rules.

The Neal Bill remains before the House Ways and Means Committee.

Canada Set to Impose New Unilateral Sanctions Against Iran

Wed, 28 Jul 2010 10:36:08 GMT

Canada is set to impose new sanctions against Iran on Monday, according to the Globe and Mail. This move underscores Canada’s alignment with the U.S. and European Union, which have imposed tougher sanctions than those approved earlier by the United Nations in order to further pressure Tehran to drop what is widely believed to be a nuclear-weapons program. The new measures, which will be announced by Foreign Affairs Minister Lawrence Cannon, "will include a ban on any new Canadian investment in Iran’s oil and gas sector, and restrictions on exporting goods that could be used in nuclear programs, including non-nuclear material that could be used in nuclear research and development. In addition, Iranian banks will be barred from opening branches in Canada and Canadian banks will not be able to set up operations in Iran."

As noted in the Globe and Mail article, although "Canada's commercial ties to Iran are not so vast that Ottawa’s sanctions will be a deep blow to Tehran," the new Canadian sanctions "are intended to be part of increasing Western pressure." The article further reports that Australia and Japan are expected to follow suit.

The article can be accessed by clicking here.

Hong Kong: Government Proposes to Establish Independent Insurance Authority

Wed, 28 Jul 2010 10:30:14 GMT

On 12 July 2010 the Secretary for Financial Services and the Treasury, Professor K C Chan, released a consultation paper entitled "Proposed Establishment of an Independent Insurance Authority". The insurance sector and the public have a 3 month consultation period (which ends on 11 October 2010) in which to provide their views.

Professor K C Chan stated that the Hong Kong Special Administrative Region Government (the HKSAR Government) proposes to follow international regulatory practices and establish an insurance regulatory authority that is both financially and operationally independent from the HKSAR Government. Under the proposal the independent insurance authority would take over from the current Insurance Authority and Office of the Commissioner of Insurance, which is a governmental department. Such a move, the HKSAR Government suggests, would enable better regulation of insurers and insurance intermediaries (including insurance agents and brokers) through professional and responsive operation of the proposed Independent Insurance Authority (the IIA), therefore enhancing protection to policy holders and maintaining market stability and competitiveness.

The HKSAR Government proposes that the IIA should be responsible for licensing all intermediaries before they can sell insurance products. The HKSAR Government believes that, compared to the existing self-regulatory system for licensing intermediaries, the proposed arrangements will be more effective. It is proposed that insurance products sold through banks will be regulated by the Hong Kong Monetary Authority (the HKMA). This has been criticised on grounds that licensing of intermediaries and regulation of products will be carried out by two different regulators.

The Financial Services Bureau plans to introduce a bill to lawmakers next year, with 2013 to be the earliest that the IIA would be set up.

Federal Court Orders Party to Produce Copies of its Reinsurance Agreements Under Fed. R. Civ. P. 26

Tue, 27 Jul 2010 15:06:51 GMT

Plaintiff moved to compel production of defendant American Red Cross' reinsurance agreements. Defendant objected on the grounds that it was self-insured up to $1 million, and, in its counsel's opinion, any judgment in the action would not exceed that amount. Relying upon precedent in the Seventh Circuit, as well as other federal court decisions from other jurisdictions, the U.S. District Court for the Central District of Illinois held that defendant's reinsurance agreements were discoverable and must be produced as part of a its initial disclosures under Rule 26(a)(1) of the Federal Rules of Civil Procedure, because a judgment in the action could at least potentially exceed the amount of the defendant's self-insurance. As such, the court granted that portion of plaintiff's motion to compel.

Click here to review a copy of the District Court's decision, captioned Hartman v. American Red Cross, No. 09-1302 (C.D. Ill. 2010).

Federal Regulation of the Insurance Industry: We Are Living in Interesting Times

Tue, 27 Jul 2010 13:10:05 GMT

The week of July 19, 2010 was an interesting week for the insurance industry with developments affecting the industry as a whole and a proposal to regulate life settlements as securities at the federal level.

On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (See Conference Report here) and the Government Accounting Office issued a report on life settlements (See GAO report here). The following day, the Life Settlements Task Force of the Securities and Exchange Commission (see SEC press release here which includes a link to the full report attached) issued its own report on life settlements.

The Dodd-Frank legislation, as its full name suggests, is not primarily focused on reforming the insurance industries. However, the statute does carve-out new roles for federal regulators to manage systemic risk to the financial services system posed by large financial services companies, including insurers, to establish national standards for access to reinsurance and for reinsurance collateral and to gather information about the insurance industry. The law also addressed a long-simmering dispute regarding the regulation of equity-indexed annuities with Congress coming down on the side of state regulation of these products and specifically carving such annuities out of the definition of a “security” under federal law. (See our earlier blog).

While Congress concluded in the case of equity-indexed annuities that insurance products are best regulated by the state and not as securities by the SEC, the SEC report recommends that Commission consider recommending to Congress an expansion of the federal definition of securities to include life settlements, including the sale of single policies of insurance although not sales by the original policy owner. The SEC report (as well as the GAO report) focuses on the differing approaches to regulation of life settlements adopted by states, many of which have also amended their “blue sky” laws to include life settlements (other than sales by original policy owners) as sales of securities. Both the SEC and the GAO note the varying standards imposed on life settlement providers or brokers regarding disclosures to sellers and buyers of life settlements. The SEC’s Life Settlement Task Force believes that federal regulation is necessary to bring “clarity to the status of life settlements” and “more consistent” treatment of life settlements under state and federal law.

The SEC report includes a detailed discussion of a number of enforcement actions brought against promoters of investments in life settlements, all of which either involved sales of fractional interests in policies or pools of policies. Generally, the SEC has been successful in arguing that these cases involved the sale of securities because they involved the issuance of interests in a pool of policies or formation of a partnership to invest in life settlements. Under this line of cases, the SEC has relied on the so-called “Howey” test to establish that those transactions involved the sale of securities.

Both the SEC and the GAO reports recommend further study and monitoring of the life settlement industry. Along with its report, the SEC issued an “Investor Bulletin on Life Settlements” suggesting that investors consider a number of points before investing in a life settlement, including risks related to longevity and insurer refusal to pay death benefits.

We will continue to monitor developments relating to life settlements at the federal and state level. If the SEC follows the task force’s recommendation promptly, it is unclear whether Congress would take up a proposal to amend the definition of “securities” with any urgency given the midterm elections and the calls for it to focus on measures to revive the economy. The refutation of the SEC’s exercise of authority over equity-indexed annuities in the financial services legislation suggests that Congress will not as a matter of course endorse any such SEC’s proposal.

UK: HM Treasury Launches Financial Services Reforms Consultation

Mon, 26 Jul 2010 10:51:14 GMT

HM Treasury has today (26 July 2010) launched its consultation on the implementation of financial regulation reforms, originally announced by the Chancellor on 16 June 2010 (click here to see our original post and here to see our most recent post on the subject).

The consultation paper continues to focus on the UK banking system, with little mention of insurers and no specific mention of insurance intermediaries. However, it is possible to draw a few conclusions based on the information given:

- prudential regulation of insurers will be undertaken by the Prudential Regulatory Authority (PRA), a subsidiary of the Bank of England;

- insurers' consumer-focused activities will be regulated by the Consumer Protection and Markets Authority (CPMA) (although this is described in the consultation paper as a "working title"), meaning that retail insurers will effectively have two regulators;

- insurance intermediaries will be regulated by the CPMA, both in terms of their consumer-focused activities and in relation to authorisation and prudential regulation;

- the Treasury is considering whether to bring non-financial services companies within a financial services group within the the PRA's regulatory sphere; and

- groups which contain both insurers and intermediaries will have to deal with two different prudential regulatory regimes, undertaken by separate regulators.

The chief executive of the PRA will sit on the board of the CPMA, and vice versa, in order to ensure that the two authorities work together appropriately, although the preliminary impact assessment acknowledges that firms may incur transitional costs in making arrangements to deal with two regulators rather than one and may also face higher ongoing costs.

The Financial Ombudsman Scheme and the Financial Services Compensation Scheme will remain independent of the regulators, although the consultation paper calls for comments on whether the FSCS fits more closely within the remit of the CPMA or the PRA and, more fundamentally, whether the current system under which there is a degree of cross-subsidy between different classes of financial services firms should continue. A further consultation is expected to be launched in the autumn to discuss whether the regulation of consumer credit should be transferred to the CPMA.

The consultation closes on 18 October 2010.

Click here to download a copy of the consultation and accompanying press release and summary.

Healthcare News from Capitol Hill and the Department of Health and Human Services – July 26, 2010

Mon, 26 Jul 2010 10:47:01 GMT

In response to the Centers for Medicare and Medicaid Services’ (CMS’) proposed hospital inpatient rule for FY 2011, lawmakers urged the agency to reconsider payment reductions in a July 12 letter. The following week, the agency released its proposed rules for home health and skilled nursing facilities. In other news, the Department of Health and Human Services (HHS) issued final rules for achieving “meaningful use” of electronic health records.

LAWMAKERS URGE CMS TO HALT HOSPITAL CUTS:

In an effort to convince CMS to reconsider its proposed Medicare inpatient hospital payment reductions due to documentation and coding practice changes, 242 House Members sent a letter to the agency’s newly-installed Administrator, Donald Berwick, on July 12. In their letter, lawmakers cited the proposed 2.9 percent cut in reimbursements that CMS claimed would eliminate the effect of coding changes not related to the severity of a patient’s illness.

The bipartisan group of House Members continue by urging the agency “to re-examine this issue and mitigate these reductions in payment,” emphasizing the negative impact that the cuts – which would amount to $3.7 billion – would have on hospitals in both urban and rural communities nationwide. Their concerns echo those expressed by the American Hospital Association and the Federation of American Hospitals in June.

CMS is expected to issue a final FY 2011 inpatient hospital rule by early August.

PROPOSED CHANGES FOR HOME HEALTH & SKILLED NURSING FACILITIES:

On July 16, CMS issued a proposed rule that would amount to a $900 million reduction to home health agencies. A combination of the annual market basket update and payment provisions mandated by the new healthcare reform law (Public Law 111-148), these proposed cuts would represent a 4.75 percent decrease in reimbursements to home health agencies in calendar year 2011.

On the same day, CMS also released its notice of payment rates for skilled nursing facilities in FY 2011, in which reimbursement rates would increase by a total of $542 million – or 1.7 percent. In addition, the agency’s notice also cited a delay in the implementation of a provision in the healthcare reform law that changes the Resource Utilization Groups, Version 4 (RUG-IV) case-mix classification system.

Comments on the proposed rules are due in September, with final rules set to be released later this year.

HHS RELEASES FINAL ‘MEANINGFUL USE’ RULES:

Under the Health Information Technology for Economic and Clinical Health (HITECH) Act of 2009, eligible hospitals and healthcare professionals qualify for Medicare and Medicaid incentive payments when they adopt certified electronic health records (EHR) technology and use it to achieve specified objectives.

On July 13, HHS Secretary Kathleen Sebelius announced two final rules that will help such entities qualify for up to $27 billion in federal funding. The first regulation defines the “meaningful use” objectives that providers must meet to qualify for the bonus payments. The final rule divides meaningful use objectives into a required group of “core” objectives – 15 for physicians and 14 for hospitals – and a group of “optional” objectives that providers can choose to defer in 2011 and 2012. HHS has referred to this as a “two track” approach, stating that it will guarantee that the basic elements of meaningful use will be met by all providers qualifying for incentive payments, while simultaneously allowing flexibility in other areas to reflect providers’ needs in adopting full use of EHR.

When compared with the proposed rule on meaningful use, the final rule scales back the thresholds that providers must meet. For instance, the final rule includes 44 quality reporting measure requirements, scaled back from 90 measures in the proposed rule. In addition, the final language requires that 40 percent of prescriptions be transmitted electronically during the first stage of EHR adoption, as opposed to the 75 percent threshold in the proposed rule.

The requirements for meaningful use will be implemented over the next several years, and additional measures that will raise quality objectives for EHR will be gradually phased in. By 2015, those not in compliance will face penalties by way of reductions in Medicare reimbursements.The second regulation identifies the technical capabilities required for certified EHR technology, and is similar to the interim final rule released earlier this year in terms of standard terms to describe clinical problems and procedures, standard formats for prescriptions and requirements for the secure internet transport of such information.

According to HHS, these announcements marked the completion of multiple steps that have laid the groundwork for the incentive payments program. With the final definitions and requirements in place, EHR vendors can ensure that their systems deliver the required capabilities and providers can be assured that the system they use will support achievement of meaningful use objectives.

Both rules will appear in the July 28 Federal Register, with the meaningful use rule taking effect 60 days after publication and the standards and certification rule taking effect 30 days after publication. Organizations representing physicians, hospitals and patients have expressed support for the final rulings.

NEXT STEPS:

We will continue to monitor Congress, CMS and other relevant federal agencies as the implementation of healthcare reform progresses and other healthcare matters arise, and will continue to provide new updates as developments occur.

Update from RAA Re Contracts Conference – Presentation on Dispute Resolution Clauses

Fri, 23 Jul 2010 10:15:45 GMT

Vince Vitkowsky of Edwards Angell Palmer & Dodge LLP presented on Thursday concerning Dispute Resolution Clauses in reinsurance contracts, which specifically focused on arbitration clauses. Though there are various forms of dispute resolution used in commercial practice, arbitration has been the standard method in the reinsurance industry since the 1800s. He suggested that despite criticisms of the arbitral process, arbitration is the most practical and fair way to resolve disputes in the reinsurance industry, since parties are able to have their dispute heard before one or more arbitrators who almost always have significant experience in the reinsurance world, instead of judges who may be overburdened or have less knowledge and interest in reinsurance. Though the pool of arbitrators to select from in the U.S. is small, those that make up the pool are very qualified and committed to rendering a fair award.

Mr. Vitkowsky reviewed some of the wordings currently used in modern dispute resolution clauses. He suggested that the most important clause is one which sets out the process for selecting an umpire, who often acts as the "neutral" arbitrator on a three-person panel. Reinsurance arbitrations typically involve a panel of three arbitrators, in which each of the parties chooses one “party-appointed” arbitrator, and then those two arbitrators choose the third (the umpire). Although many contracts allow for procedures that leave the selection up to chance, the most reliable way to obtain a fair outcome is to stipulate in the agreement that the umpire will be chosen from an accredited list such as the ARIAS umpire database.

Mr. Vitkowsky also highlighted some of the more unusual arbitration clauses. One example is a “baseball clause,” whereby each party presents the panel with monetary suggestions for the award and the panel then chooses only between those two suggestions. “Night baseball” is a variation on this idea, whereby the parties do not disclose their suggestions for the award until after the panel has put forth its own suggestion, at which time the party’s suggestion closest to the panel’s will prevail.

Update from RAA Re Contracts Conference – Presentation on Extra Contractual Obligations and Losses in Excess of Policy Limits

Fri, 23 Jul 2010 10:11:49 GMT

We have been tracking developments at the RAA Re Contracts Conference, which took place this week in New York, as previously reported on www.insurereinsure.com.

On Wednesday, Arthur Gang of Partner Re U.S. gave an instructive presentation concerning extra contractual obligations (“ECO”) and losses in excess of policy limits (“XPL”). He presented a useful recap of the seminal Supreme Court case, State Farm Mutual Automobile Insurance Co. v. Campbell, in which an insured (Campbell) was involved in a highway collision that resulted in a fatality and disabling injuries to other drivers. His policy with State Farm had a $50,000 limit and the plaintiffs’ attorney offered to settle for that policy limit. State Farm, however, refused to settle, despite an initial investigation that indicated liability and a “near certain possibility” of excess verdict.

A jury verdict was ultimately rendered against Campbell for $185,849, from which State Farm only agreed to pay the $50,000 policy limit and refused to cover any defense costs in an appeal of the verdict. When the lower court’s judgment was affirmed on appeal, State Farm then agreed to pay the entire amount. Nevertheless, Campbell sued State Farm for fraud, bad faith and intentional infliction of emotional distress, and sought damages for an amount that far exceeded the limits of the State Farm policy.

Mr. Gang explained that there is a tripartite relationship between an insured and insured which includes the duty to defend, indemnify and act in good faith. In the Campbell case the allegation was that State Farm acted in bad faith by gambling with its insured’s (Campbell’s) money and, as a result, Campbell was damaged from the degree of concern and uncertainty he endured. In his lawsuit against Sate Farm, Campbell sought extra contractual damages – damages beyond anything covered in the policy – on account of how State Farm handled his case. The jury awarded Campbell $2.6 million in compensatory damages and $145 million in punitive damages, an award which was affirmed by the Utah Supreme Court. Upon appeal, the U.S. Supreme Court held that the $145 million in punitive damages was excessive in that it was not proportionate to the compensatory damages, but noted that State Farm’s claims handling merited no praise and simply remanded the case to the lower courts for recalculation of the damages.

Mr. Gang suggested the case demonstrates that when things start to go wrong in a case, they often do not get better. At the end of the day, instead of settling for the $50,000 policy limit when it had a chance to do so, State Farm was obligated to pay $185,849 for the jury verdict, $1,002,087 for extra contractual compensatory damages, $9,018,780 for extra contractual punitive damages and an unknown amount in legal expenses for over twenty years of litigation. Cases such as this one have resulted in ECO and XPL clauses being inserted into modern reinsurance contracts and Mr. Gang went on to give an informative overview of these types of provisions.

Obama Administration Reiterates Opposition of NFIP Expansion to include Windstorm Coverage

Fri, 23 Jul 2010 09:35:22 GMT

The Obama Administration, through the Office of Management and Budget, has reiterated its position that it is against the expansion of the National Flood Insurance Program (“NFIP”) to include coverage for windstorm damage. We previously wrote about the Obama Administration’s position on the NFIP last year. The timing of the announcement coincides with Rep. Gene Taylor’s (D.-Miss.) Multiple Peril Insurance Act (H.R. 1264) that is being considered in the U.S. House of Representatives this week. Among the reasons for the Administration’s opposition to H.R. 1264 are that it believes “expanding NFIP to cover windstorm insurance would unnecessarily duplicate available insurance products” and that “[a]t a time when the NFIP is already facing serious challenges [regarding reauthorization], the Administration cannot support such an expansion.” For additional information regarding Congress’s recent struggles in keeping the NFIP active, click here.

We will continue to follow this issue and provide further updates on InsureReinsure.com.

UK: Law Commission Publishes Issues Paper 8 on Brokers' Liability for Premiums

Fri, 23 Jul 2010 08:18:53 GMT

On 19 July 2010, the Law Commission published an Issues Paper on the broker's liability for premiums under Section 53 of the Marine Insurance Act 1906. Section 53 makes the broker directly responsible to the insurer for the premiums due under an insurance contract, whether or not the broker has received them from the policyholder. It overrides the normal rule of agency law that an agent is not personally liable on a contract effected for its principal.

The legal basis for this custom was a fiction that the broker had paid the premium to the insurer, thus discharging the policyholder's liability to pay, and that the insurer had lent the money back to the broker. This created a personal debt obligation between the broker and the insurer. The problem which has faced the courts is how, if at all, the common law fiction applies under the modern law.

The Issues Paper addresses the complexity of the section and the problems it creates in particular in respect of payment clauses such as adjusted premium clauses and premium payment warranties. It concludes that in practice, Section 53 is not needed in the market. It therefore proposes that the section be reformed and the default position should be that policyholders are liable for the premium payments due under their insurance policies. This would allow the insurer to sue the policyholder for the premium, if unpaid. The policyholder receives the benefit of the insurance coverage and so it is the policyholder who should primarily be liable for it.The broker would not be liable for the premium unless it had expressly assumed such liability.

The Law Commission seeks responses to its proposals by 19 October 2010. If you would like to view the Issues Paper, please click here.

UK: Court of Appeal Considers Whether Lack of Client Care Letter Prevents Recovery of Insured Costs

Fri, 23 Jul 2010 08:14:44 GMT

In Ghadami and Ghadami v Lyon Cole Insurance Group [2010] EWCA Civ 767, the Court of Appeal considered whether the deputy judge at first instance had erred in assessing that the claimant's liability was limited to paying the excess of the insurance policy.

The case concerned whether an agreement had been reached between Cole and its solicitors, CMS Cameron McKenna, as to McKenna's costs in defending Cole against a claim brought by Mr and Mrs Ghadami. The Ghadamis' claim was dismissed and they were ordered to pay Cole's costs. Cole was covered for its costs of defending the claim by a professional indemnity insurance policy issued by Markel which was subject to a £1,000 excess. It was understood by all the parties that Cole would pay the £1,000 excess and would be indemnified by Markel for costs incurred by Cole in excess of £1,000. The Ghadamis argued that Cole had agreed with McKenna that Cole would only be liable to McKenna for the £1,000 excess and not any additional costs. Accordingly, the Ghadamis argued, they could not be liable to pay any of Cole's costs which were in excess of £1,000.

The Court of Appeal found that there was no such agreement between Cole and McKenna. The Court criticised McKenna for failing to provide Cole with a client care letter, which would have set out details concerning McKenna's costs. Nonetheless, there was an implicit agreement between McKenna and Cole that McKenna would act as its solicitors in the proceedings brought by the Ghadamis. McKenna was therefore entitled to charge reasonable costs for the work reasonably done, and Cole was able to recover the same from the Ghadamis.

This case shows the importance of solicitors complying with their obligations to provide a client care letter at the time of engagement by the client.

UK: English Commercial Court Considers Challenge to an Arbitration Award

Fri, 23 Jul 2010 08:09:45 GMT

In B v A [2010] EWHC 1626 (Comm), Mr Justice Tomlinson was asked to determine a preliminary issue concerning whether the claimant (B) had a realistic prospect of challenging an arbitration award (the Award) under sections 67 and 68 of the Arbitration Act 1996 (the Act).

The dispute arose following the sale by B to A of 100% of the share capital in C and the debt owed by C to B. A, B and C were all Spanish companies and the Share Purchase Agreement (the SPA) was written in English but governed by Spanish law. The SPA provided that disputes were to be referred to arbitration under the Rules of Arbitration of the International Chamber of Commerce (the ICC) with the seat of the arbitration in London and proceedings in English. Neither the parties nor the dispute had any connection with England or English law. A sought from B sums exceeding €54m (in excess of the original purchase price) alleging "dolo" (fraud) and breach of the express representations and warranties in the SPA. The Award, made by a majority, ordered B to indemnify A pursuant to an express indemnity provision in the SPA (Article 10.1).

The dissenting arbitrator, issuing an opinion of some 19 pages, stated that the majority of the arbitration panel had ignored the parties' agreement to submit the SPA to Spanish law and had decided the dispute "ex aequo et bono" (dispensing with the law and deciding the matter in a manner which they considered to be fair and equitable). She concluded that the Award was illegal as a matter of public order under Spanish law. It was, in the opinion of Tomlinson J, this dissenting opinion that led B to challenge the Award under sections 67 and 68 of the Act for lack of substantive jurisdiction (section 67) and/or serious irregularity (section 68).

B alleged that the lack of jurisdiction and/or serious irregularity had arisen because, in contravention of section 46 of the Act, the tribunal failed to decide the dispute "in accordance with the law chosen by the parties as applicable to the substance of the dispute".

A submitted, and it was accepted by the judge, that "for a challenge of this sort to have any prospect of success, a conscious disregard of the provisions of the chosen law is a necessary but not a sufficient requirement." The judge considered that any suggestion of "conscious disregard" was unsustainable in this case as the arbitrators had carefully considered the provisions of Spanish law. B led expert evidence on Spanish law which disagreed with the interpretation of Article 10 of the SPA as adopted by the majority arbitrators. The judge held that even if the evidence of the expert was right, the arbitrators would at most be shown to have made an error of law. Applying the House of Lords decision in Lesotho Highlands Development Authority v Impregilo SpA [2005] UKHL 43, Tomlinson J held that an error of law does not involve an excess of power under section 68(2)(b) of the Act.

Turning to B's reliance upon section 67 of the Act (which was abandoned in the Lesotho case), the judge held that it was "plain" that it could not be invoked and that "an error in the application of the chosen law does not involve a lack of substantive jurisdiction as it is defined in the Act. If demonstrated, which here it is not, a breach of section 46 can as I see it be addressed only under section 68(2)(b)." He therefore dismissed B's challenge of the Award.

In this case, the claimant sought to rely on the views of the dissenting arbitrator. Of note is the finding by Tomlinson J regarding the status of a dissenting opinion. He held that it does not formally form part of the award made by a tribunal and was comforted by the findings of a large majority of a Working Party of the ICC Commission on International Arbitration in their Final Report on Dissenting and Separate Opinions (adopted in 1988), who reached the same conclusion. He did however hold, citing F Limited v M Limited [2009] 1 Lloyd's Rep. 537 at 543, that a dissenting opinion "might be admissible as evidence in relation to procedural matters, as where for example it is alleged that some aspect of the procedures adopted in the arbitration worked unfairly to the disadvantage of one party".

To view the judgment in full please click here http://www.bailii.org/ew/cases/EWHC/Comm/2010/1626.html

UK: Court of Appeal Rejects Insurers' Appeal for Access to Privileged Documents Held by the Law Society

Thu, 22 Jul 2010 13:46:09 GMT

The Court of Appeal has affirmed a High Court decision that prevents solicitors' insurers from gaining access to privileged documents held by the Law Society after an intervention in the firm. In Quinn Direct Insurance Ltd v Law Society of England & Wales [2010] EWCA Civ 805 the Court unanimously rejected Quinn's appeal against the decision of Mr Justice Peter Smith (see our previous blog here).

The facts of the case were that claims had been made by third parties against a two-partner firm regarding payments made out of the client account in connection with conveyancing transactions carried out by one of the partners. Quinn contended that these claims suggested dishonesty by that partner and declined to provide an indemnity to him on those cases. After the Law Society intervened in the firm and took possession of all its files, Quinn requested access to see whether there was evidence linking the other partner to the dishonest actions.

In the Court of Appeal, Quinn argued that as solicitors' professional indemnity insurers they were "meshed in" to the supervisory jurisdiction of the Law Society and the regulatory system under which it operates. The court disagreed, saying that insofar as they were "meshed in", it was only as the provider of indemnity insurance and not as the recipient of any services or information, let alone privileged information. Even if they were "meshed in" to such a degree as argued by Quinn, the request for documents was not made for any regulatory purpose and was "completely at odds with the regulatory role."

The Court of Appeal also gave four further arguments for rejecting the appeal:

- an insured solicitor is not bound to disclose to his insurer confidential or privileged information belonging to the client without consent;

- the solicitor has a duty of good faith towards his insurer, but the privilege remains that of his client and cannot be broken or waived without consent;

- even if the policy or the regulatory scheme obliged solicitors to disclose privileged material to insurers, and/or to the Law Society, there is no similar requirement for the Law Society to disclose to the insurer;

- while there may sometimes be a 'circle of confidence', for example between the Law Society and the Intervention Agent, there is no reason why it should include the qualifying insurer.

UK: English High Court Rules on Purported Avoidance of After the Event Insurance

Thu, 22 Jul 2010 13:42:05 GMT

In Persimmon Homes Ltd v Great Lakes Reinsurance (UK) Plc [2010] EWHC 1705 (Comm), the High Court ruled that dishonesty on the part of a claimant which has taken out after the event (ATE) insurance can amount to a material non-disclosure such that the insurer may avoid the policy.

Persimmon Homes Ltd (Persimmon) was the defendant in litigation with another property development company, CPH. CPH had taken out ATE insurance with Great Lakes Reinsurance (UK) Plc (Great Lakes). Persimmon was successful in the underlying action, in which the judge found that CPH, through its directors, had been dishonest regarding a number issues and had fabricated evidence. Persimmon was awarded its costs on the indemnity basis. CPH was subsequently wound up, and Persimmon therefore sought to recover under CPH's insurance policy with Great Lakes under the Third Parties (Rights Against Insurers) Act 1930. Great Lakes then avoided the policy for non-disclosure, on the basis that, inter alia, CPH had failed to disclose its dishonest conduct and fabrication of evidence when the risk was presented. Persimmon argued that in the context of ATE, the factual account of the underlying events was not material to the risk. It also argued that Great Lakes had not been induced by the non-disclosures and misrepresentations, that it had waived any right to avoid the contract and/or that it had negligently underwritten the risk.

The expert witnesses for both Persimmon and Great Lakes agreed that the alleged non-disclosures and misrepresentations, if established, were material to the risk. Persimmon's argument regarding the special context of ATE insurance therefore failed. As regards inducement, Mr Justice David Steel held that Great Lakes had plainly been induced by the non-disclosures and misrepresentations; Great Lakes would not have entered into the policy had it been aware of CPH's fraudulent behaviour. Similarly, since it had no knowledge of the systemic dishonesty of CPH, there could be no question of the right to avoid being waived. Finally, as regards negligent underwriting, it was held that although some underwriters may have rejected the risk, there was no evidence that all underwriters would have certainly rejected it. There was therefore no basis for finding that the underwriter in question had been negligent. As such, Great Lakes had validly avoided the policy and Persimmon's claim was therefore dismissed.

This case will give comfort to insurers that ATE insurance does not fall outside the normal rules of non-disclosure and misrepresentation and their right to avoid will be upheld where their policyholder has been dishonest. The case may also serve as a warning to those defendants who face claims brought by claimants with ATE insurance: should the claim be fabricated and based on dishonesty, the ATE insurance may be avoided and so be of no value, and the best course of action may be to apply for security for costs at an early stage.

Delaware Bankruptcy Court Rules That Directors & Officers May Access Eroding Policy Despite Company’s Bankruptcy

Thu, 22 Jul 2010 13:37:42 GMT

A federal judge has ruled that directors and officers of a company in bankruptcy proceedings may continue to access an eroding liability policy to cover their defense costs. The court based its decision on a close examination of the policy language, and alternatively held that the individual directors and officers had shown they were entitled to relief from the automatic stay. In re: Downey Financial Corp., No. 08-bk-13041 (CSS) (Bankr.D.Del. May 7, 2010).

The debtor’s D&O policy provided up to $10 million in coverage, after a $1 million retention. The policy stated that it would pay first on behalf of individual insureds, and then on behalf of the organizational insured. It also stated that the carrier’s obligations would not be affected by any bankruptcy filing the organization might make.

Prior to its bankruptcy filing, the debtor had been involved in a number of lawsuits. In May and June 2008, two separate shareholder classes sued the debtor and some of its officers in federal court in California, alleging violations of federal securities laws. The debtor, some of its officers, and all of its directors were later sued in two separate shareholder derivative actions, filed in California’s state courts. The debtor paid all of the directors’ and officers’ defense costs, which amounted to $588,000 by November 2008.

That November, the Office of Thrift Supervision seized the debtor’s principal subsidiary, a savings and loan association located in California. The debtor filed its Chapter 7 petition on November 25, 2008. After the debtor filed its petition, the United States Trustee took the position that the debtor’s D&O policy was property of the estate and, therefore, could no longer pay the directors’ and officers’ defense costs. The directors and officers sought relief from the bankruptcy court.

After carefully reviewing the policy’s terms and relevant caselaw, the bankruptcy court disagreed with the Trustee. Because the policy gave first priority in the policy’s proceeds to the individual officers and directors, the court held that they had claims superior to those of the debtor. And, because the debtor was now insolvent, the court held, the policy’s terms required the D&O carrier to pay out the proceeds for the insureds’ defense costs, notwithstanding the fact that the entire retention amount had not first been paid. In other words, the court said that the policy’s proceeds belonged not to the bankrupt estate, but to the individual insureds.

In the alternative, the court held that the insureds were entitled to relief from the automatic stay, for purposes of receiving defense costs from the D&O carrier.

A complete copy of the opinion is available here.

UK: FSA Fines Approved Person for Unsuitable PPI Advice

Thu, 22 Jul 2010 13:31:51 GMT

On 9 July 2010, the Financial Services Authority (FSA) fined David Head £10,500 for putting customers at risk of receiving unsuitable advice on Payment Protection Insurance (PPI). Head, a director of Essex based mortgage and insurance broker network, FT Compliance Services Limited, and an FSA approved person, failed properly to supervise insurance and mortgage brokers who advised on PPI sales.

The FSA investigation found that when a single premium PPI was sold, the brokers did not properly consider the eligibility of the customer and failed to take into consideration any medical conditions or existing insurance that may have made the PPI unsuitable. There was also no evidence of customers being informed that PPI could be purchased from other providers.

To view the FSA's press release, click here.

United States Supreme Court Asks for Federal Government's Opinion on Applicability of the McCarran-Ferguson Act to the New York Convention

Thu, 22 Jul 2010 12:22:01 GMT

The U.S. Supreme Court recently asked the Solicitor General to file a brief on behalf of the United States expressing its views on whether the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the "New York Convention") and the federal legislation that enforces it, the Federal Arbitration Act ("FAA"), are subject to the reverse preemption provision of the McCarran-Ferguson Act. At issue in the case is the applicability of a Louisiana state law that deems arbitration agreements in insurance contracts to be unenforceable. As previously discussed, when the U.S. Court of Appeals for the Fifth Circuit reversed a Louisiana district court ruling and held that, under the McCarran-Ferguson Act, the Louisiana state law does not "reverse preempt" the provisions of the New York Convention mandating arbitration of reinsurance agreements that fall within that statute. The plaintiff in the lawsuit, the Louisiana Safety Association of Timbermen - Self Insured Fund, has filed a writ of certiorari with the U.S. Supreme Court asking it to address the Fifth Circuit's decision and decide whether the portion of the FAA that implements the New York Convention is subject to the reverse-preemption provisions of the McCarran-Ferguson Act.

Stayed tuned for developments in this case on www.insurereinsure.com.

New York State Court Finds that Follow the Settlements Doctrine Does Not Apply

Wed, 21 Jul 2010 11:10:26 GMT

In American Home Assurance Co. v. American Re-Insurance Co., No. 602485/06 (N.Y. Sup. Ct. May 27, 2010), the plaintiffs, several ceding companies, brought a declaratory judgment action against certain reinsurers (collectively, the “Reinsurers”) seeking reimbursement for portions of a settlement plaintiffs made with their insured, Monsanto Corporation. The Reinsurers provided coverage for a number of excess general liability policies that plaintiffs issued to Monsanto. Monsanto manufactures chemical and agricultural products, including polychlorinated biphenyls (“PCBs”).

Monsanto had been sued by the U.S. Environmental Protection Agency and others for environmental contamination at the various sites where it manufactured PCBs. Monsanto ultimately settled with all parties for approximately $600 million and filed a declaratory judgment action against plaintiffs and a number of other insurers seeking insurance coverage for environmental damages caused by its PCBs operations throughout the U.S.

In 1993, Monsanto and plaintiffs entered into a settlement in which plaintiffs agreed to pay $7.3 million for Monsanto’s government-ordered costs to remediate certain contaminated sites. For third-party claims, plaintiffs and Monsanto agreed that, after exhaustion of an $80 million per site “deductible,” plaintiffs would pay 50% of Monsanto’s expenses and liabilities up to a $150 million cap. The 1993 agreement defined “third-party claims” as “[e]nvironmental or pollution related claims asserted by a non-governmental entity as a result of activities attributed to Monsanto at any alleged waste site or Monsanto owned site.”

Nearly ten years later, Monsanto informed plaintiffs that it had exhausted the deductible by paying claims arising out of Monsanto’s PCBs manufacturing operations. Monsanto also paid $550 million to settle two other related lawsuits and sought reimbursement of $150 million from plaintiffs under its 1993 agreement. Initially, plaintiffs disputed whether these most recent payments were made as the result of “third-party claims” within the meaning of the 1993 agreement. After mediation, however, plaintiffs and Monsanto entered into a 2004 agreement in which plaintiffs agreed to pay Monsanto approximately $140 million.

Plaintiffs then billed the Reinsurers for a portion of its payment to Monsanto. The Reinsurers denied coverage on the basis that plaintiffs’ payment was ex gratia because it covered claims that were outside the scope of the reinsured policies. The Reinsurers also argued that they had no obligation to indemnify plaintiffs for the settlement payment because plaintiffs had failed to conduct a reasonable and businesslike investigation of certain claims billed by Monsanto before entering into that settlement (and failed to assert potential coverage defenses under the policies). Ultimately, the Reinsurers moved for summary judgment on both of these issues.

The Supreme Court, New York County (Ramos, J.), granted the Reinsurers’ motions, finding that plaintiffs’ claims were not reasonably within the scope of or arguably covered by its underlying policies with Monsanto. As such, the Reinsurers were not bound to follow the settlement. The court also found that in entering into the settlement with Monsanto, plaintiffs glossed over critical coverage issues, unnecessarily exposing the Reinsurers to non-covered claims. Specifically, the court noted that plaintiffs’ policies contained certain exclusions that appeared to provide a valid defense to at least some of the claims covered by the settlement with Monsanto. Thus, the court further held that the Reinsurers did not have to follow the fortunes, because plaintiffs failed to conduct a reasonable, businesslike investigation of the underlying claims before making its settlement payment to Monsanto.

We are monitoring this case for a possible appeal. For a complete copy of the court’s decision, click here.

RAA/Contracts Conference in New York

Wed, 21 Jul 2010 10:18:37 GMT

Edwards Angell Palmer & Dodge is a sponsor of the Reinsurance Association of America’s reinsurance education programs. Vincent J. Vitkowsky, Partner in New York, will be presenting at the seminar "Dispute Resolution Clauses in Contracts" presented at the Reinsurance Association of America's ReContracts program on July 22, 2010 in New York City. If you are planning to attend the conference, please come by our booth and meet our attorneys and to network with your peers in the industry.

For more information, please click here.

UK: Law Commission Publishes Paper on The Insured's Post-Contract Duty of Good Faith

Wed, 21 Jul 2010 09:21:22 GMT

The Law Commission has published an Issues Paper considering the insured's post-contract duty of good faith, in particular, the law of fraudulent claims, focusing on what remedies should be available to insurers if policyholders act fraudulently.

The Commission examines the law where a policyholder suffers a legitimate loss but then adds a fictitious claim to that loss. In practice, the policyholder will lose its entire claim but any previous legitimate claims are unaffected. This approach is at odds with Section 17 of the Marine Insurance Act 1906 which entitles an insurer to avoid the contract from the start. In theory, this entitles an insurer to require the policyholder to repay all past claims under the policy even though all of those claims are genuine. The Law Commission proposes that Section 17 be amended to reflect the current common law position. In addition, it suggests that the insurer should be entitled to damages from a policyholder for the costs of investigating a fraudulent claim.

The Issues Paper also considers fraudulent claims in joint and group insurance. With respect to joint insurance, the Commission suggests that where one insured party commits a fraud, it should be open to an innocent insured party to rebut the presumption that the fraud has been committed on behalf of all the insured parties. With respect to group insurance, it queries whether there is the need to make special provision for fraudulent claims by group members to give insurers similar remedies to those available where a policyholder acts fraudulently.

Lastly, the Commission queries whether UK law should follow the Principles of European Contract Law and recognise an on-going duty of disclosure by the policyholder in the absence of a specific contract term.

The Law Commission has requested responses to its proposals by Monday 11 October 2010. If you would like to view the Issues Paper, please click here.

We will be considering this latest paper from the Law Commission in our September 2010 issue of the Insurance and Reinsurance Review.

UK: FSA Reforms - Update

Wed, 21 Jul 2010 09:15:42 GMT

We have reported previously on the UK government's proposals to reform the regulatory structure in the UK and abolish the FSA (click here to see our post).

Lyndon Nelson, director of risk management at the FSA, spoke at a meeting of the All Party Parliamentary Group on Insurance and Financial Services last Wednesday, 14 July 2010. The following is a short summary of what he is reported to have said:

- The FSA will reorganise internally from the end of January 2011 to match the proposed Prudential Risks Authority/Consumer Protection and Markets Authority structure.

- The internal structure will run for about a year, with a final "go live" for the new Authorities currently timetabled for late June 2012.

- A Government consultation paper is to be published this Friday, 23 July, dealing with the proposed reforms.

- Separate consultations are expected to follow on the proposed Economic Crime Agency and on consumer credit, but timetables for these have not yet been fixed.

We continue to monitor developments and will report them here. The consultation paper, in particular, will be of great interest.

ERISA Litigation: An Update from the ALI-ABA Conference on Financial and Insurance Litigation

Wed, 21 Jul 2010 09:06:22 GMT

ERISA litigation, once considered a dull backwater of the law, has been gaining increased interest and attention in recent years: the result of an aging population and an increasingly sophisticated and aggressive plaintiffs' bar. In the last quarter-century, since 1984, the Supreme Court has decided no fewer than 58 ERISA cases, including three significant decisions last term:

[1]
Conkwright v. Frommert, __ U.S. __, 130 S.Ct. 1640 (2010), in which the Supreme Court reaffirmed its longstanding policy of deference to Plan administrators, and overturned a Second Circuit holding that a court need not defer to an administrator's interpretation of a Plan "where the administrator ha[s] previously construed the same [Plan] terms and [the court] found such a construction to have violated" the statute;

[2]
Hardt v. Reliance Standard, 130 S. Ct. 2149 (2010), in which the Supreme Court clarified the standard for attorneys' fee awards to a "prevailing party" -- allowing such awards whenever a claimant showed "some degree of success" even if there was no enforceable judgment on the merits -- ; and

[3]
Kennedy v. Dupont, 555 U.S. __, 129 S.Ct. 865 (2009), in which the Court held that an ex-wife's waiver of rights to her ex-husband's benefits, as part of a divorce decree, did not validly divest the ex-wife of her rights to those benefits, absent some amendment of the Plan designation form or "succeeding designation of an alternate payee."

One result of this attention is that plaintiffs' counsel have become increasingly aggressive in suing ERISA fiduciaries and related parties -- including top corporate management -- who are alleged to be "knowing participants" in an ERISA breach. These suits generally allege violations of ERISA Section 404 (duty of loyalty) and/or Sectio 406 (setting out various prohibited transactions). There are two broad categories of these suits:

[1]
Stock-drop cases, which allege malfeasance by Plan fiduciaries in continuing to offer a company's stock as part of an ERISA Plan, after the stock drops significantly as a result of circumstances which the Plan fiduciaries allegedly knew or had reason to know. These suits resemble securities fraud cases. However, they are sometimes more attractive to plaintiffs, because they do not have the same heightened pleading (scienter) requirements, and include statutory attorneys' fees as an alternative to common fund recovery. See, e.g., In re Citigroup ERISA Litigation, 2009 WL 2762708 (S.D.N.Y 2009); In re Harley-Davidson, Inc. Securities Litigation, 650 F.Supp.2d 953 (E.D. Wis. 2009)

[2]
Excessive-fee cases, which allege imprudence by Plan fiduciaries by selecting overpriced, high-fee investment options, and failing to disclose the Plan's fee structure. See, e.g., Hecker v. Deere & Co., 556 F.3d 575 (7th Cir. 2009); Braden v. Wal-Mart Stores, 588 F.3d 585 (8th Cir. 2009).

Although these cases have met with mixed success, they show no signs of going away. They are rapidly becoming part of the legal landscape for companies that maintain ERISA plans, and for the insurance and financial services companies involved in the administration of these Plans.

Extension of Group Health Plan Coverage to Adult Children

Tue, 20 Jul 2010 09:50:43 GMT

The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively, the "Affordable Care Act") require group health plans and insurers that provide dependent coverage to extend health care coverage to adult children until they reach age 26. Please click here to read more.

Join the U.S. Reinsurance Under 40s Group at its Summer Social Event in New York

Mon, 19 Jul 2010 15:59:22 GMT

The U.S. Reinsurance Under 40s Group invites you to its Summer Social Event, which will take place on August 5 at 6:00 at Bourbon Street Bar and Grille. For more information and to RSVP, please click here.

If you would like to learn more about the Under 40s Group, you can visit the Group's website or contact Brian Green or Rob DiUbaldo, who are both on the Group's board.

Live Blog: Class Action Procedure: The Latest Developments from ALI-ABA Conference on Insurance and Financial Services Litigation

Mon, 19 Jul 2010 15:21:11 GMT

This panel offered the insights of a federal district court judge, defense counsel and plaintiffs’ counsel regarding Class Action Procedure, focusing on trends regarding the class certification process.

The panel began with a discussion of Eisen v. Carlisle, 417 U.S. 156 (1974) – a case in which the Supreme Court said that courts were not permitted to inquire into the merits of the case at the class certification stage. According to some of the panelists, this holding has since been modified greatly by the Circuit Courts, most notably in In Re IPO Litigation, 471 F.3d 24 (2d Cir. 2006). The court in In Re IPO, held that Eisen did not preclude the court from establishing the Rule 23 requirements where they overlap with the merits of the case (although In Re IPO did not establish that the court could address the merit of non-Rule 23 issues). According to the panelist, the In Re IPO decision has been accepted by a majority of the other Circuit Courts as well. Not surprisingly, the defense counsel panelists believed that the merits and class certification issues are generally inextricably intertwined, while plaintiffs’ counsel panelists believed that dealing with the merits at the class certification stage was not only unfair to plaintiffs, but leads to the deterioration of the clearly set out litigation stages.

The discussion on In Re IPO set the stage for a discussion of whether courts should entertain evidentiary hearings and potentially Daubert motions with respect to class certification issues. While defense counsel were generally wholeheartedly in favor of such evidentiary hearings and Daubert Motions, plaintiffs’ counsel were unsurprisingly more skeptical for the need in some situations. Plaintiffs’ counsel panelists, however, did acknowledge that such hearings and motions may be necessary in some situations (and noted that they generally have confidence in their ability to survive Daubert Motions given the strength of their experts).

Among the most beneficial parts of attending this panel discussion was to hear the perspective from a Federal District Court judge on the class action process and procedure. Unsurprisingly, he explained that generally a judge will look to the reasons behind allowing class actions generally, and then look at the case or issue at hand and determine whether the underlying purpose for class actions is being served or not. When the defense counsel panelists suggested their clients general preference to avoid class action proceedings, the judge noted that he believed that more defendants should take the class action situation as an opportunity to deal with cases against them in one fell swoop, rather than dealing with them on an individual basis.

Live Blog: Changes in Securities & Insurance Regulation Affecting Enforcement Strategies ALI-ABA Conference on Insurance & Financial Services Litigation

Mon, 19 Jul 2010 08:56:01 GMT

Speakers at the ALI-ABA’s annual conference on insurance and financial services regulation in Chicago offered extensive commentary on changes in enforcement strategies for insurance and securities fraud, in light of recent overhauls to the regulatory scheme. Representative panelists from the SEC and FINRA commented on federal enforcement strategies, while a state insurance commissioner’s representative opined about updates and changes in state-level enforcement.

Universally, regulators are concerned about insurance fraud on senior citizens. One panelist commented that there are so many scams in the current marketplace that regulators would be able to occupy themselves for years with enforcement actions. Current regulatory concern is focusing mainly on the marketing of variable annuity contracts and stranger-originated life insurance products, with some lesser concern on the market for life insurance settlements. For its part, the SEC has begun to scrutinize the life settlement industry, which has grown from $2 billion a year in 2001 to $16 billion a year in 2008.

From the perspective of the SEC and FINRA, current “free lunch” marketing schemes and bogus sales certifications, particularly for products marketed toward seniors, are a major concern. Both highlighted extensive enforcement actions that they are taking in their respective realms to curb the activity. The SEC is taking action against financial institutions that market these products, and FINRA is pursuing enforcement actions against individual and institutional broker-dealers who are selling them. In particular, FINRA is issuing new rules (including Rule 2330) and reminding broker-dealers that they have an obligation to pass on the suitability of particular investment classes before recommending them to customers.

The SEC is taking a particularly aggressive stance with respect to investments involving life insurance contracts. It takes the position that selling interests in pools of life insurance policies constitutes the offering of a security, as it does with the selling of fractionalized interests in a single life insurance policy. Its litigation position is that the offerors of these insurance products must submit a registration statement, abide by the disclosure requirements of the Securities Act, and sell their products only through licensed broker-dealers. The aim, according to the SEC, will be to protect the consuming public from fraud.

State regulators are moving in tandem with the SEC and FINRA, though, to rein in abuse of variable annuity products; and some states, including Iowa, have gone so far as to implement regulations affecting the sale of fixed annuity products. What has not changed, however, is the state-by-state regulation of insurance in the United States. State auditors are continuing to monitor the financial health of insurers and acting in the role of consumer watchdog.

Very recent developments in the law are affecting enforcement strategies. On July 15, the DC Circuit invalidated SEC Rule 151A, which attempted to define a class of annuities that fell outside the statutory exemption from registration provided by the Securities Act, on grounds that it is ambiguous. At the same time, though, the passage of the financial reform bill by the United States Senate on July 15 is spurring new regulatory efforts. Section 989J of the proposed legislation, for instance, gives broad new regulatory authority to the SEC and a host of other entities. The state insurance commissioners do not necessarily see the demise of Rule 151A as a bad thing, though. Several regulators saw the shift in enforcement from market-oriented regulators to securities-oriented regulators as ill-advised, primarily due to different enforcement methodologies. They are generally welcoming the additional regulatory muscle that they, too, will get under Section 989J of the financial reform bill.

Live Blog: Class Action Trial Analysis and Discussion: Plaintiff and Defense Perspectives on Recent Trials and Settlements of Life Insurance and Annuity Class Actions from ALI-ABA Conference on Insurance and Financial Services Litigation

Fri, 16 Jul 2010 10:38:07 GMT

This panel offered a history of class action litigation involving life insurance and annuity products. According to the panelists, the class actions in the life insurance context (with the exception of ERISA suits) were virtually unheard of prior to 1993. Throughout the mid to late 1990’s there were in the area of 300 class actions involving sales practices and misrepresentations. Many of those suits were settled before the class certification process. Of those that progressed to the certification stage, defendants were highly successful in defeating class certification. After the suits against life insurance companies began to die down, there were many suits involving annuities, which had more success in being certified as class actions because of their use of consumer fraud statutes to overcome one of the major barriers to class certification – reliance.

Some of the highlights included a discussion of considerations involved in determining whether to settle or proceed to trial, how to plan, prepare and conduct the trial, and issues to consider when negotiating a settlement. Interestingly, the panel--both defense counsel and plaintiff’s counsel--agreed on many nuances regarding the planning and preparation for trial. They explained that regardless of whether one plans to proceed to trial or to eventually settle the case, the goal is to proceed with discovery and motion practice in a way that puts your client in the best possible position for settlement, a motion for summary judgment, or trial.

A central point was the issue of discovery or depositions of absent class members (i.e., members of the class other than the class representatives). The ability to obtain this discovery can be key to defendants in defeating class certification and for rebutting the class-wide inference on loss causation. Although the panelists acknowledged that access to these absent class members may be difficult to obtain from the judge, especially in the face of arguments by plaintiffs’ counsel that the class representatives provide a representative sample of the class. Although judges may allow depositions of these class members, they may limit the number of depositions.

The defense counsel panelists explained that their ability to depose a small number of absent class members in a recent annuity class action was instrumental to receiving a favorable jury verdict because those depositions showed that many of the class members were unlike the class representatives because those absent members deposed were fully educated on the purchase of the annuity products.

The second half of the session focused on the Aviva class action suit (a suit filed against Aviva’s predecessor) for allegations involving deferred annuity sales to seniors. That suit involved allegations that deferred annuity sales to seniors. Plaintiffs alleged that the products were unsuitable, that key terms were not disclosed and that the living trusts were used as “door openers.” The suit was ultimately settled. The panelists perspectives on this suit, which focused in large part on settlement of the suit and the considerations involved therein, were especially interesting because the panel consisted of counsel for the defendants, counsel for the plaintiffs and an in house representatives from the defendants.

Minnesota Federal Court Rejects “Capacity” Limitation As To Insured Vs. Insured Exclusion

Fri, 16 Jul 2010 10:06:48 GMT

The U.S. District Court for the District of Minnesota recently dismissed a directors and officers liability coverage suit, rejecting plaintiffs' argument that an underlying suit had to be brought by the insured in his capacity as an insured in order to implicate the policy's insured vs. insured exclusion. Ideal Development Corporation v. United States Liability Insurance Company, Civil No. 10-772 (PAM/RLE) (July 13, 2010).

In the underlying lawsuits, a director of the named insured brought claims against the named insured and members of its board of directors for breach of fiduciary duty and related causes of action arising from a blocked tender offer. The named insured and its directors tendered the defense of the claims to their D&O insurer, who denied coverage on the basis of the policy's insured vs. insured exclusion. The named insured and its directors then brought suit for wrongful denial of coverage, arguing that the insured vs. insured exclusion did not apply because the former director brought suit in his capacity as a shareholder rather than as a director and did not collude with the other insureds in bringing suit.

The Court found that the undisputed language of the policy did not contain any "capacity" carve out to the insured vs. insured exclusion and did not require collusion between the insureds, and that the exclusion unambiguously excluded the underlying suits from coverage. The Court therefore entered summary judgment for and dismissed all claims against the insurer.

For a copy of the decision, please click here.

California Bill to Amend New Life Settlement Law

Fri, 16 Jul 2010 09:13:55 GMT

This updates our June 23, 2010 blog posting.

California State Senator Ron Calderon introduced Senate Bill 1242 (“SB 1242”) to amend California’s life settlement law which went into effect July 1, 2010. Click here for a description of the new law. If adopted, SB 1242 would, among other things: (1) delete the requirement that an applicant for a life settlement broker or agent license provide any information required by the California Insurance Department (“CDI”); and (2) delete the requirement that settlement brokers disclose the life expectancy estimates used to price the policy.

Click here for a copy of SB 1242.

We will continue to monitor this topic.

Financial Reform Package Preserves the Role of State Insurance Departments in Regulating Indexed Annuities

Fri, 16 Jul 2010 09:10:39 GMT

This updates our December 22, 2008 blog, and other related postings.

In December 2008, the U.S. Securities and Exchange Commission (the “SEC”) adopted Rule 151A (the “Rule”) classifying equity-indexed annuities (“EIAs”) as securities, and subjecting them to federal regulation effective 2011. The Rule has been hotly debated, as some believe that EIAs are adequately regulated by states and that federal regulation would only result in additional costs in registering and selling the products. Now, two years after the SEC’s adoption of the Rule, Congress has approved an amendment (the “Amendment”) to H.R. 4173, the Dodd-Frank Wall Street Reform and Consumer Protection Act bill, which preserves state regulation of EIAs.

The Amendment retains state insurance department oversight of EIAs provided that: (1) the EIAs comply with nonforfeiture laws; (2) they are issued by companies domiciled in states which have adopted suitability standards that at least meet the requirements set forth in the NAIC Suitability in Annuity Transactions Model Regulation; and (3) the issuing companies implement nationwide suitability standards in the states in which they conduct business that at least meet the requirements set forth in the NAIC Suitability in Annuity Transactions Model Regulation.

H.R. 4173 has been approved by the House and Senate and has been sent to President Obama for signature.

Hong Kong: Securities and Futures Commission Publishes New Handbook

Fri, 16 Jul 2010 09:04:42 GMT

On 25 June 2010, the Securities and Futures Commission of Hong Kong (the SFC) published the new SFC handbook (the Handbook), which came into immediate effect. The Handbook was one of the introductions suggested in the Consultation Conclusions on Proposals to Enhance Protection for the Investing Public, published on 28 May 2010. The Handbook includes revised product codes for unit trusts and mutual funds and for investment-linked assurance schemes in addition to a new product code for unlisted structured investment products.

With immediate effect, applications to the SFC for fund and investment-linked assurance scheme authorisation will need to comply with the revised Code on Unit Trusts and Mutual Funds and the revised Code of Investment-linked Assurance Schemes respectively. However, for existing SFC authorised funds and investment-linked assurance schemes, revised parts of the respective codes will either not need to be implemented or require implementation over a 12 month transitional period. In respect of SFC authorised funds only, certain revised sections of the Code on Unit Trusts and Mutual Funds may be implemented at the discretion of the fund manager at a later stage.

The new Code on Unlisted Structured Investment Products (the SIP Code) will also take effect as of 25 June 2010. The SIP Code immediately applies to an application to renew an authorisation that existed before 25 June 2010 and all applications in respect of which authorisations had not been granted as at 25 June 2010. There are, however, a number of transitional arrangements in respect of unlisted structured investment product offering document(s) or advertisement(s) that were authorised before 25 June 2010.

For more information see the SFC's website by clicking here.

Live Blog from the Insurance and Financial Services Litigation Conference: Madoff Fallout Extends to Insurance Coverage

Thu, 15 Jul 2010 15:52:03 GMT

In addition to the panel on class actions (which we blogged about here), we attended an interesting panel this morning about a less publicized outgrowth from the Madoff litigation -- insurance coverage litigation. In the case of Horowitz v. AIG Int’l Group, Inc., No. 09-cv-7312 (S.D.N.Y. Aug. 19, 2009), two Madoff investors sued their homeowner’s insurer on behalf of a class of insureds. Plaintiffs alleged that the insurer wrongfully failed to cover the loss of money to Madoff’s scheme under a insurance policy provision covering loss “directly from fraud, embezzlement or forgery.” The insurer took the position that only “net losses” are covered under the policy – i.e., where the investor paid more money to Madoff than he withdrew from Madoff. The insurer has moved to dismiss on the grounds that the plaintiffs were actually net “winners.”

The session also addressed the recent success that feeder funds and auditors have had in defending against lawsuits by arguing that they were misled as well by Madoff’s scheme.

Live Blog -- ALI-ABA Conference: Class Action Developments

Thu, 15 Jul 2010 14:39:13 GMT

Several InsureReinsure.com bloggers are attending the ALI-ABA Conference on Insurance and Financial Services Litigation in Chicago. Earlier today, one of the panels addressed recent developments in the area of class action certification, particularly in life insurance and annuities litigation. The discussion focused on cases involving fraud claims, which have been seen as difficult to prosecute as a class action due to individual issues of reliance and causation. However, courts in recent cases have granted certification, applying surprisingly lenient standards. Most notably, in In re National Western Life Ins. Deferred Annuities Litig. (S.D. Cal.) (click here to read the decision), the court on Monday granted certification of a fraud claim under RICO related to the sale of deferred annuities nationwide. The court found that reliance is a question “common” to the class, because “consumers are nearly certain to rely on prominent (and prominently marketed) features of a product which they purchase.” The speaker pointed out that this analysis is very close to “presumed causation.” This and other recent cases, particularly out of California and the Ninth Circuit, have threatened to greatly liberalize the standard for obtaining class certification in fraud cases.

UK: Financial Services Authority Bans Three Individuals who Defrauded Insurers Through Coverholder Arrangements

Thu, 15 Jul 2010 11:53:24 GMT

On 8 July, the Financial Services Authority (FSA) banned Timothy Higgins, Clifford Felstead and Ralph Brunswick (who were found guilty in June 2008 of conspiring to defraud Markel, QBE and Amalfi Underwriting) from working in regulated financial services. The FSA delivered the prohibition because the behaviour of the individuals posed a severe risk to confidence in the financial markets and to assist in reducing financial crime.

Higgins was a director and Felstead was an employee of Security Guarantee Consultants (SGC) who held binding authorities with Markel and QBE (through its agent Amalfi) to write surety bonds. SGC exceeded its authorised limits under the binding authority and made a secret profit by withholding over £2m that should have been paid to the insurers. In addition, when audited by the insurers, SGC provided false surety bonds that fell within the authorised limits of the binding authority. Brunswick, who worked for Templeton Insurance Company Limited (based in the Isle of Man), provided SGC with false surety bonds to cover the difference between the binding authority limits and the actual bonds issued, so it looked like the excess cover would be picked up by Templeton (not Markel or QBE). SGC also lied to QBE when QBE were informed that an SGC employee had a conviction for fraud. SGC said that Felstead would no longer work for the company, when in fact, he continued to work on SGC's surety business. Brunswick has been disqualified as a director for 13 years and 6 months by the Isle of Man regulator. The FSA noted that Higgins would have been fined £600,000 had he not recently been made bankrupt.

For the FSA's final notice in respect of Brunswick, click here, for the FSA's final notice in respect of Felstead click here, and for the final notice in respect of Higgins click here.

Solvency II - Bermuda and Switzerland in Line for First Equivalency Assessments

Thu, 15 Jul 2010 11:48:48 GMT

On 14 July 2010, the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) published its draft advice on equivalence assessments to be undertaken in relation to three areas of the Solvency II directive, being reinsurance, group supervision and group solvency. CEIOPS proposes that in its first wave of assessments, Bermuda and Switzerland should be considered for equivalence in all of these areas and Japan in respect of reinsurance only.

CEIOPS notes that "advice on possible countries should focus primarily on the risk based nature of the third country regime and the materiality of an equivalence finding to EU insurance and reinsurance undertakings and their policyholders." When considering these factors, Bermuda, Switzerland and the US scored highly and all were considered of importance to the EU market. That Bermuda has been highlighted will be a fillip for the jurisdiction, as it follows significant work by the Bermuda Monetary Authority to ensure that it achieves equivalence with Solvency II.

The particular difficulties in making an assessment of US equivalence, combined with the resources required to undertake multiple simultaneous assessments, led to CEIOPS proposing not to undertake an equivalence assessment of the US at this stage. The door is not closed, however, as the draft advice sets out a possible process to assess US equivalence should the European Commission decide that the US should be in the first wave.

Comments on the draft advice are requested by 13 August 2010. A copy of the draft advice can be found here.

National Flood Insurance Program Reinstated by Temporary Extension

Wed, 14 Jul 2010 10:53:26 GMT

The National Flood Insurance Program (“NFIP”) expired on May 31, 2010 and, for the third time this year, the NFIP lapsed for a month. On July 1, 2010 the NFIP was reauthorized retroactive to June 1, 2010 and this reauthorization will expire on September 30, 2010.

During the month lapse, the NFIP was not in operation and did not issue new and renewal policies and did not increase coverage amounts on existing policies. Any new policy applications or renewals that were signed and submitted during the lapse, however, will be effective from the date of application.

Industry groups were pleased with the reauthorization of the NFIP, but continue to believe that long-term reforms are necessary. Robert Rusbuldt, President and CEO of the Independent Insurance Agents & Brokers of America (“Big I”) , stated: “While the Big I is appreciative of Congress extending the program on a temporary basis, we are also greatly concerned that these short expiration periods and patchwork of temporary extensions will negatively impact the market.” HR 5114, sponsored by Rep. Maxine Waters, D-Calif., is awaiting action by the House and would reauthorize the NFIP for five years.

We will continue to monitor NFIP-related developments and provide updates at www.InsureReinsure.com.

Lloyd's Will Not Insure or Reinsure Petroleum Shipments to Iran

Tue, 13 Jul 2010 10:37:38 GMT

According to a recent Reuters article, Lloyd's of London, the world's largest insurance market, has said it will comply with sanctions signed into law by President Obama on July 1.

Lloyd’s of London will not insure or reinsure petroleum shipments going into Iran. The Lloyd’s marine insurance market represents 15 to 20 percent of the total marine insurance industry. The decision by Lloyd's follows sanctions signed into law by President Obama focusing on Iran's fuel imports and aiming to further isolate Iran in the international arena. According to Reuters, Lloyd's general counsel Sean McGovern said that “The US is an important market for Lloyd’s and, in recognition of this, the market will not insure or reinsure refined petroleum going into Iran....Lloyd’s will always comply with applicable sanctions.”

Although Iran is one of the world's biggest exporters of crude oil, it has suffered from a lack of investment in its refineries and other petroleum-related infrastructure due to sanctions, "forcing the OPEC member to import some 40 percent of its gasoline needs," according to Reuters. Reuters further reported that Louise Nevill, head of marine hull at Talbot Underwriting, said Iran would find it tougher to get insurance cover. “A sanction, whether it’s US or UN, does not just affect Lloyd’s[,] it should affect all insurance providers,” she told Reuters. “It’s going to be a struggle [for Iran] and will probably end up having some sort of desired effect.”

J. Peter Pham, senior fellow at the National Committee on American Foreign Policy think tank, told Reuters that “Historically, Lloyd’s has been a leader and many will follow.... One has to consider the value of US and European markets versus the very limited Iranian market.”

Reuters further reported that "[t]he sanctions were also having an effect on the P&I Club market, which are marine insurers owned by shipping clients. Norwegian P&I Club Skuld said this week that US legislation was wide enough to expose insurers to the risk of sanctions, such as the blocking of dollar transactions and freezing of US assets. Skuld added that its board had been 'invited as a matter of urgency' to consider restrictions on cover for vessels involved in refined petroleum shipments to Iran to protect members’ interests."

Update: Bloomberg Reports Sharp Decline in Offshore Oil Rig Drilling Insurance As Underwriters Tack Away From BP Disaster-Type Risk

Tue, 13 Jul 2010 10:04:46 GMT

Citing a number of industry executives, Bloomberg recently reported that the Deepwater Horizon rig explosion – causing the largest oil spill in U.S. history – has prompted a reduction in the placement of insurance coverage for deepwater oil exploration. According to the Bloomberg article, corporations may now need “to self-insure or exit deepwater fields.”

Increased premiums and the impracticality of insuring one-time, catastrophic loss events could mean deepwater operators will need to be entirely self-insured, said James Eck, vice president senior credit officer at Moody's Investors Services Inc. in New York. “What insurer is going to want to put out $1 billion worth of deepwater insurance and only get paid $5 to $10 million after this? They may as well write a few more hurricane-insurance contracts,” Eck said.

BP’s Deepwater Horizon disaster is “a market-changing event,” said Dieter Berg, senior executive manager marine insurance at Munich Re, the world’s largest reinsurer and among those covering related losses. “Buyers and sellers of coverage will be reevaluating their appetites for offshore energy risk,” said Berg.

Insurers are beginning to re-evaluate how much they can risk to underwrite as the Deepwater Horizon disaster exposes higher liabilities than previously thought, said Gregory Thomas, head of offshore activities at Assuranceforeningen Skuld, an Oslo-based underwriter for deepwater contractors.

John Lloyd, chief executive of Lloyd & Partners reported in written testimony to the U.S. Senate that insurance cover available may decline as much as 30 percent in deepwater oil exploration area. Moody’s also reports that Underwriters are charging as much as 50 percent more for policies covering offshore oil rigs in deep waters since the April 22, 2010 Deepwater Horizon disaster.

Stay tuned for regular updates.

Healthcare News from Capitol Hill and the Department of Health and Human Services – July 12, 2010

Mon, 12 Jul 2010 09:03:12 GMT

In late June, two Members of Congress requested that the Centers for Medicare and Medicaid Services (CMS) expedite the implementation of a Medicare home care demonstration project. In other CMS news, the agency issued a proposed outpatient hospital rule in early July, and during Congress’ July 4th recess, President Obama made the decision to officially appoint his CMS Administrator.

LAWMAKERS REQUEST SPEEDY IMPLEMENTATION OF HOME CARE DEMO:

The new healthcare reform law (Public Law 111-148) authorized the Independence at Home demonstration program – a program designed to enable Medicare beneficiaries with multiple chronic conditions to maximize their independence and meet their specific needs by bringing coordinated physician- and nurse practitioner-led primary care teams to their homes. The law will provide a total of $25 million for the demonstration program and sets a 2012 deadline for implementation.

In late June, however, the program’s authors – Senator Ron Wyden (D-OR) and Congressman Edward Markey (D-MA) – wrote to CMS, urging the agency to implement Independence at Home within six months. The two noted that the program should be put in place expeditiously because it has the potential to help chronically-ill Medicare beneficiaries who often receive disjointed and unnecessarily costly care. In addition, the lawmakers noted that the program’s funding will be available beginning this year.

CMS has stated that it is committed to implementing this and other provisions of the new healthcare law as soon as possible.

MEDICARE OUTPATIENT HOSPITAL PAYMENTS TO INCREASE:

On July 2, CMS issued a proposed rule relating to outpatient hospital payments, in addition to covering the implementation of various provisions of Public Law 111-148. Specifically, the rule would increase payments to more than 4,000 outpatient hospital facilities by 2.2 percent – paying such facilities an estimated $40 billion in 2011. CMS also proposed adding six quality measures to those that must currently be reported by outpatient hospitals, bringing the total 17. Such measures include claims-based imaging efficiency measures, an emergency department measure and a measure based on health information technology.

With regard to graduate medical education (GME), the proposed rule would implement the provisions in the new healthcare law that require the redistribution of unused residency slots to certain hospitals with qualified residency programs, in a manner that emphasizes an increase in primary care physicians. Further, the proposed rule also touches on the physician self-referral provisions of the healthcare law – notably by limiting the expansion of current physician-owned hospitals and narrowing other rules relating to such facilities.

Comments on the proposed rule are due by the end of August, and CMS is expected to issue a final rule by November 1.

CMS ADMINISTRATOR NAMED IN RECESS APPOINTMENT:

When Members of Congress left town for the 4th of July holiday, President Obama used the opportunity to make several so-called “recess appointments,” including that of Dr. Donald Berwick to the position of CMS Administrator. Such a step allowed the Administration to side-step a potential confirmation battle in the Senate, and will allow Dr. Berwick to serve as the head of CMS through 2011, as the agency works to implement healthcare reform.

NEXT STEPS:

We will continue to monitor Congress, CMS and other relevant federal agencies as the implementation of healthcare reform moves forward and other healthcare-related issues arise, and will continue to provide timely updates as new developments occur.

Connecticut District Court: Insurer's Default Judgment Does Not Necessarily Preclude Litigation in Subrogation Action

Mon, 12 Jul 2010 08:34:23 GMT

A Connecticut District Court recently held that plaintiffs, who brought a subrogation action to recover a judgment entered in their favor in an underlying legal malpractice action against their attorneys, were entitled to litigate coverage issues even though the attorneys' insurer obtained a default judgment against the attorneys in a separate coverage action. Victoria Gambino v. American Guarantee & Liability Insurance Co., No. 3:09-CV-304(CFD). For a complete copy of the opinion, please click here.

Plaintiffs were injured in an automobile accident and enlisted the services of a law firm to bring a claim on their behalf. When the law firm failed to bring a claim or obtain a settlement within the statute of limitations, Plaintiffs sued the law firm and the individual attorneys for malpractice (the "Malpractice Action"). The Malpractice Action eventually resulted in a stipulated judgment for $75,000 in Plaintiff's favor. Before judgment entered in the Malpractice Action, however, the law firm's insurer ("Insurer") brought a separate declaratory judgment action to rescind the policy based on misrepresentations in the policy application (the "Coverage Action"). The Insurer obtained a default judgment against the attorneys and law firm in the Coverage Action.

Plaintiffs brought a subrogation action to enforce the judgment from the Malpractice Action against the Insurer pursuant to Conn. Gen. Stat. § 38a-321, which the Insurer removed to federal court on the basis of diversity jurisdiction. Plaintiffs argued that because the policy was in effect at the time Plaintiffs' right of action arose, the default judgment in the Coverage Action did not prevent them from seeking to enforce the policy. The Insurer contended that because the policy was rescinded, it had the effect of voiding the policy from its inception, and that Plaintiffs were barred by the doctrines of res judicata and collateral estoppel from re-litigating the issue of rescission.

The court held that Plaintiffs' claim was not barred by res judicata because Plaintiffs were not in privity with the law firm in the Coverage Action and, as a result, their interests were not represented in that action. In this regard, the court explained that although theoretically Plaintiffs and the attorneys would have had an interest in the policy remaining operative, the attorneys lacked an incentive to defend the rescission action because they were judgment proof and facing harsher penalties, including criminal prosecution. Similarly, the court found that Plaintiffs' claim was not barred by collateral estoppel because the rescission issue was not "actually litigated" in the Coverage Action. Citing the well established principle that an issue is "actually litigated if it is properly raised in the pleadings or otherwise, submitted for determination, and in fact determined," the court could not characterize the coverage issue as having been litigated because the judgment was obtained by default after one defendant failed to appear and the others, although appearing, did not defend the suit.

West Virginia Human Rights Act Prohibits Discrimination by Insurer in the Settlement of Property Claim

Mon, 12 Jul 2010 08:26:59 GMT

In a recent decision, the Supreme Court of Appeals of West Virginia concluded that the West Virginia Human Rights Act prohibits discrimination by an insurer in the settlement of a property claim. The full decision can be found here.

The facts of the underlying action giving rise to the instant action originated from the alleged negligence of Appalachian Heating, LLC. Appalachian Heating was hired by the Charleston-Kanawha County Housing Authority to repair and/or replace climate control units in South Park Village, a public housing development located in Charleston, West Virginia. The Plaintiffs, who are African American, resided together in an apartment located in South Park Village. On November 21, 2006, the apartment in which the Plaintiffs resided caught fire, allegedly due to negligence on the part of Appalachian Heating, causing a total loss of the Plaintiffs’ personal property and rendering the apartment temporarily uninhabitable. The defendant in the instant action provided liability insurance coverage to Appalachian Heating.

Following the fire, the insurer settled the Plaintiffs’ claims for $2,500. Thereafter, the plaintiffs commenced the instant action by filing two separate complaints, which were consolidated. Both complaints alleged, inter alia, that the insurer had violated the West Virginia Human Rights Act in settling their claims. The Plaintiffs contended that the insurer did not give their fire loss claim the same opportunity and consideration when evaluating their loss as it extends to persons who are not African American and who do not reside in public housing. Thus, the Plaintiffs argued that the insurer violated the West Virginia Human Rights Act and their cause of action should stand. The insurer filed a motion to dismiss each case, arguing that the Plaintiffs are barred from bringing their Human Rights Act case by a provision of the West Virginia Unfair Trade Practices Act (“UTPA”) that provides the only method for bringing a third-party action against an insurance company based upon its settlement practices.

The Court analyzed whether West Virginia’s Human Rights Act prohibits discrimination in the settlement of a property damage claim, and whether the UTPA precludes a third-party action against an insurer brought under said statute. As a result, the Court held that the West Virginia Human Rights Act prohibits unlawful discrimination by an insurer in the settlement of a property damage claim when the discrimination is based upon race, religion, color, national origin, ancestry, sex, age, blindness, disability or familial status. The Court also found that the UTPA and the Human Rights Act seek to remedy different harms, and no conflict exists between them. Therefore, the prohibition of a third-party law suit against an insurer under the UTPA does not preclude a third-party cause of action against an insurer under the West Virginia Human Rights Act. Accordingly, the action was remanded to the Circuit Court for further proceedings.

UK: Financial Services Authority and Financial Reporting Council Publish Discussion Paper on Auditors' Role in Prudential Regulation

Fri, 09 Jul 2010 10:55:38 GMT

On 30 June 2010, the UK's Financial Services Authority (FSA) and Financial Reporting Council (FRC) published a joint discussion paper (DP) entitled "Enhancing the auditor's contribution to prudential regulation".

The DP considers the FSA's reliance on audit in relation to its objects of market confidence and financial stability, as well as in relation to client assets. It notes that auditing standards require auditors to exercise professional scepticism but asks whether auditors are sufficiently sceptical.

The DP also addresses how audit could be more effective for the FSA. It outlines proposals to:

- revise the Auditing Practice Board's auditing standards and practice notes
- improve cooperation between the FSA and FRC
- clarify how auditors fulfil their duty to report to the FSA
- enhance auditors' reporting on client assets
- enhance FSA and FRC powers.

The DP proposes that the FSA should engage with auditors earlier and more often, particularly in relation to high impact firms, as well as with firms' audit committees.

The DP sets out, in Annex 2, governance and reporting responsibilities of firms and their auditors.

A copy of the discussion paper can be downloaded by clicking here. Any comments should be submitted by 29 September 2010.

Microinsurance Going Macro, Especially in Latin America

Thu, 08 Jul 2010 15:43:13 GMT

In the days after the January earthquake in Haiti, some staggering numbers were reported in the media. There was approximately $14 billion in property damage, most of which occurred in Port-au-Prince, the largest city in Haiti, and 250,000 people were killed, either directly or indirectly, by the earthquake. The total amount of insured losses, however, was expected to be less than $20 million, or only 1% of the total loss. By comparison, more than one-third of the losses suffered in Hurricane Katrina were insured. Please click here to read more.

UK: Lloyd's Regulates Conflict of Interest for Underwriters of Broker E&O Insurance

Thu, 08 Jul 2010 13:04:54 GMT

On 6 July 2010, Lloyd's issued Market Bulletin Y4408 (click here to see a copy of the bulletin) clarifying the reporting requirements of managing agents who underwrite broker errors and omissions (E&O) insurance. These requirements were issued in April 2010 by Market Bulletin Y4390 (click here to see a copy of the bulletin).

Managing agents are required to disclose in their business plans whether they intend to underwrite broker E&O insurance with respect to brokers which also place business with syndicates under their management. This requirement applies to facultative reinsurance (including the reinsurance of captives), broker E&O insurance placed in the open market and line slips. However, it does not apply to business written through coverholders.

Managing agents must also report to the Lloyd's Performance Management Director any claim made on a broker E&O insurance against syndicates under their management in excess of £500,000, if the relevant broker places business with one or more of the syndicates under their management.

The requirements were issued in response to a perceived conflict of interest where managing agents both receive business from, and underwrite the liability of, brokers in the market.

UK: FSA Publishes its ICOBS Post-Implementation Review Findings

Wed, 07 Jul 2010 11:10:31 GMT

The FSA has published a statement of findings following its post-implementation review (PIR) of the Insurance: Conduct of Business Sourcebook (ICOBS) and its effect on firms' behaviour in the insurance market. ICOBS heralded a shift from the rules-based approach in the previous sourcebook to more principles-based regulation in order to allow firms more flexibility in the manner they achieved the outcomes required by the FSA. Click here to read our previous blog on ICOBS.

The main purpose of the PIR was to assess the effect that the principles-based approach has had on the general insurance market. The FSA found no evidence to show that following the move to principles-based regulation, firms had modified their processes in ways which caused detriment to consumers.

In addition to (and despite) the move to principles-based regulation, ICOBS introduced more detailed rules for protection product sales. The second aim of the PIR was therefore to determine whether firms were implementing these rules and assess whether they achieved the desired effect of a better consumer understanding of protection products. The FSA found that firms were not meeting specific oral disclosure rules. As a result, it was not possible to assess the impact of these rules. The FSA will therefore consider changing the requirements on firms selling pure protection products.

The final objective of the PIR was to examine whether consumers were negatively affected by the FSA's decision not to classify Private Medical Insurance (PMI) as a protection product. The FSA concluded that there was no "clear" evidence to suggest that removing PMI from the ambit of the detailed ICOBS rules applicable to protection products increased the risk of consumer detriment.

The FSA's statement of findings is available here.

Solvency II: The Insurance Industry's Biggest Regulatory and Compliance Challenge this Year: How well prepared is it?

Tue, 06 Jul 2010 15:22:33 GMT

EAPD's own Ambereen Salamat and Chris Collins were asked by Complinet in its Mid-Year Roundup what the biggest regulatory and compliance challenge this year will be and above all, Solvency II was the resounding response. Full text of the response is below and the article first appeared on Complinet on July 01, 2010.

Solvency II is inevitably proving to be a challenge to all sectors of the insurance industry. In particular, the impact of the new regime on group supervision rules is yet to be fully clarified so is giving rise to significant challenges. This issue is important as many of the regulations that apply under Solvency II to individual entities also apply to their groups, with the necessary adjustments. The key issue is to determine the level at which group supervision is applied. This is usually at the level of the ultimate parent undertaking of an insurance group, however, Solvency II also introduces the possibility of alternative supervision at sub-group level. For groups headquartered in the EEA, the new rules are relatively clear, so insurance groups to which they apply are able to consider the impact and plan accordingly.

However, where a group is headquartered outside the EEA, the extent of the group supervision which will apply will depend on whether group supervision in the jurisdiction in which the group is headquartered is assessed as equivalent to Solvency II. If the local group supervision is equivalent, that regime will apply. If it is not, various options are available to member states but a non-EEA-owned group may potentially be required to comply with EU rules. Until the first round of equivalency assessments has been completed and further detail provided on how the group supervisor will coordinate with the insurance group and its college of supervisors, it will be difficult for non-EEA owned insurance groups to plan to meet the challenges posed by the Solvency II group supervision rules.

UK: Regulation - The British Insurance Brokers Association Response to the Competition Commission's Decision on Payment Protection Insurance

Tue, 06 Jul 2010 13:07:36 GMT

The British Insurance Brokers Association (BIBA) has written a letter dated 24 June 2010 responding to the Competition Commission's (CC) provisional decision of 14 May 2010 in relation to how Payment Protection Insurance (PPI) is sold. Following the appeal by Barclays and others to the Competition Appeals Tribunal as to the lawfulness of the CC imposing the package of remedies, the CC carried out further work and concluded that:

i) in the context of personal loan PPI, mortgage PPI, credit card PPI and second charge mortgage PPI, the benefits of a point of sale ban as part of the package of remedies outweighed the disadvantages; and
ii) in the context of retail PPI, the CC could not be sure that the package of remedies including a point of sale ban would be substantially effective.

For the full report setting out the CC's provisional decision click here.

In its letter BIBA welcomed the CC’s provisional decision and confirmed its view that PPI remains a valuable product to meet the protection requirements of customers. BIBA has been working with others in the market to develop an optional, annually renewable, flexible solution that meets the CC's requirements. BIBA believes there is an alternative product to offer consumers which it has identified as ‘Committed Payments’ to include an ‘Unemployment Cash Plan’ and which can be promoted exclusively through the BIBA membership. BIBA also sought clarification from the CC that the point of sale ban would not be extended to catch lenders working with brokers who provide an expert protection referral service to their customers.

The CC will publish its final decision on the package of remedies in July 2010.

New Government Healthcare Website Unveiled

Fri, 02 Jul 2010 13:09:50 GMT

On July 1, the U.S. Department of Health and Human Services unveiled a new website, HealthCare.gov , to provide consumers with information on their rights and benefits under the Patient Protection and Affordable Care Act. The site offers data on U.S. insurance carriers and the products they offer and includes a timeline of when new programs under the new law will begin between now and 2014.

The centerpiece of HealthCare.gov is an interactive "insurance finder" that allows for comparison shopping among insurance options for both the individual and small-employer health insurance markets. Price estimates for health insurance plans will be made available in October, and other additions and upgrades are also planned.

Ninth Circuit Affirms Ruling That Reinsurer Has No Duty to Contribute to Settlement Payment Where Reinsured Excess Policy Was Not Triggered

Fri, 02 Jul 2010 12:32:36 GMT

Texas Farmers Insurance Company (“Texas Farmers”) issued claims-made insurance policies (transformed into occurrence-based policies through endorsement) to Kaiser Permanente, a medical facility, for the policy periods of 4/9/99-4/9/00, 4/9/00-4/9/01, and 4/9/01-4/9/02. The first two policies had a $5 million limit of liability per claim. For the policy commencing on 4/9/01, Texas Farmers reduced its coverage limit to $1 million per occurrence, and Kaiser obtained an excess policy from Ordway Indemnity Ltd. (“Ordway”) that attached above the $1 million limit of the Texas Farmers’ primary policy. The Ordway excess policy was facultatively reinsured by Lexington Insurance Company (“Lexington”).

In February 2007, the malpractice suit against Kaiser was settled for $3.2 million. Texas Farmers and Ordway disputed their respective shares of the settlement payment, and agreed to litigate that issue after the settlement was funded. Because Lexington reinsured 100% of the Ordway excess policy on a facultative basis, it agreed to step into Ordway’s shoes and litigate the contribution issue with Texas Farmers.

Texas Farmers ultimately brought an action against Lexington on the grounds that, as the reinsurer of Ordway, it was required to pay its share of the settlement above the $1 million limit of the 4/9/01-4/9/02 Texas Farmer’s primary policy. The District Court rejected Texas Farmers’ argument, finding that the underlying malpractice action involved claims that occurred before the 4/9/01-4/9/02 policy period, and thus did not trigger the Ordway excess policy (or Lexington’s reinsurance cover). Texas Farmers appealed to the U.S. Court of Appeals for the Ninth Circuit, contending that its policy was triggered when it received written notice of the claim from the insured, which occurred after the 4/9/01 date.

The Ninth Circuit rejected Texas Farmers’ argument, noting that it had changed the nature of its policies from claims-made to occurrence. Because the loss occurred prior to 4/9/01, the Texas Farmers primary policy (and Ordway excess policy) that incepted after that date were not triggered by the settlement in the underlying action. Thus, Lexington’s reinsurance coverage was not implicated, and the follow the settlements doctrine did not apply.

Click here to review a copy of the Ninth Circuit’s decision, captioned Texas Farmers Insurance Company v. Lexington Insurance Company, No. 08-55835, (9th Cir. 2010).

UK: The Problem of Piracy Reaches the English High Court

Fri, 02 Jul 2010 09:23:38 GMT

The case of Cosco Bulk Carrier Co. Ltd v Team-Up Owning Co. Ltd [2010] EWHC 1340 (Comm) was an appeal to the High Court of a decision by an arbitration panel. Mr Justice Gross, who heard the appeal, noted that the subject of the case was topical and of interest to the industry and therefore set out a lengthy judgment, despite his decision to dismiss the appeal in full.

On 5 July 2008 the vessel, a Panamax size bulk carrier, was delivered into the charter of Cosco by Team-Up Owning. On 22 February 2009 she was seized by Somali pirates whilst sailing through a transit corridor in the Gulf of Aden. The pirates compelled the Master to sail the vessel to the waters off the Somali town of Ely where she remained until she was released on 25 April 2009. She was able to resume her voyage on 2 May 2009. Team-Up Owning sought from Cosco the cost of hire of the vessel for the period 22 February 2009 to 2 May 2009. Cosco refused to pay and the matter went before an arbitration tribunal; which found in Team-Up Owning's favour.

The question which had faced the arbitrators and which was subsequently put before Mr Justice Gross was whether or not detention by pirates, piracy, or the effect of piracy entitled charterers to put the vessel "off-hire" in reliance upon clause 15 of the NYPE form of charterparty agreed between the parties. The case concentrated on the following three exceptions contained within clause 15, which set out when the charterparty would not have to pay hire: loss of time due to the "detention of the vessel by average accidents to ship or cargo"; loss of time due to the "default and/or deficiency of men"; or loss of time by "any other cause."

As with the arbitration tribunal before him, Mr Justice Gross held that the detention of the vessel by pirates did not fall within any of these exceptions. His reasoning was as follows:

• the facts of the present case did not amount to an "average accident". An accident required a lack of intent by all protagonists, including therefore, the pirates, who clearly did intent to seize the vessel.

• There was no "default or deficiency of men" as the clause had a limited meaning and was focussed on a refusal of the crew to perform duties rather than their being prevented from doing so.

• The phrase "any other cause" was limited in its meaning as it did not contain the word "whatsoever". It would not cover an entirely extraneous cause, which was beyond the natural or reasonably foreseeable. The seizure of the vessel by pirates was a "classic example" of a totally extraneous cause.

Mr Justice Gross concluded that if parties were minded to treat seizures by pirates as an "off-hire" event under a time charterparty, they should include an express provision relating to piracy into a "seizures" or "detention" clause. Mr Justice Gross highlighted the current importance of judgments relating to piracy and therefore welcomed this case "for crossing the threshold from the private realm of arbitration into a public judgment."

Investment Managers are Restricted from Making Political Contributions to Win Business -- Unregistered Advisers are Covered by the SEC’s New Pay-to-Play Rule -- Third Party Solicitors are Spared . . . if they are Registered Advisers or Broker-Dealers

Thu, 01 Jul 2010 13:07:58 GMT

Fund managers and other investment advisers will face tight new restrictions on their ability to make – or facilitate – contributions to politicians, candidates and other officials who are responsible for public assets, including pension plans and Section 529 tuition plans. The new Securities and Exchange Commission “pay-to-play” rule¹ applies to investment advisory firms that are exempt from SEC registration under the private investment adviser (fewer-than-15-clients) exemption as well as to registered investment advisers.

New Restrictions. The new rule imposes the following restrictions:

(1) A two-year waiting period before a firm can manage assets of a State or local government entity if the firm or its principals or solicitors make a campaign contribution to an official or candidate who could influence the hiring of investment managers for that entity.

• De minimis contributions will be OK.
• The timeout would remain in place after the contributor leaves the firm. Moreover, his or her new firm would have to observe the remainder of the timeout if the contribution was made within the prior six months or the contributor’s duties at the new firm involve soliciting clients.

(2) A firm and its principals are banned from directly or indirectly soliciting from others, or “bundling:”

(a) campaign contributions to officials of a State or local government entity to which the firm provides, or is seeking to provide, investment advisory services and
(b) payments to political parties in the state or locality where the adviser is providing or seeking to provide such services.

(3) A firm may not pay a third party solicitor or placement agent to solicit public investment advisory business unless the third party is an SEC-registered investment adviser or broker-dealer.

• This softens the SEC’s original proposal, which would have banned payments to anyone but an employee or affiliate of the investment manager for soliciting public business.

Compliance Procedures and Recordkeeping. Registered investment advisers will need to enhance their compliance procedures and comply with detailed new recordkeeping requirements to address contributions and soliciting activities subject to the rule. Although the SEC’s recordkeeping rule does not apply to unregistered fund managers or other advisers, they are subject to the anti-fraud provisions of the Investment Advisers Act and must have adequate procedures to ensure compliance with applicable law. Therefore, unregistered advisers would be prudent to maintain similar records as well as enhancing their supervisory procedures.²

Transition Period. The restrictions on managing public assets following a contribution and the new recordkeeping requirements will take effect in March 2011, except that registered investment companies have until July 2011. Investment advisers may not use unregistered third parties to solicit government business after July 2011.

1 Release IA-3043 (7/1/10)

2 In any event, hedge funds and private equity funds with at least $150 million in assets under management are expected to lose the ability to rely on the private investment adviser exemption under the Dodd-Frank Act, so they will become fully subject to the SEC’s recordkeeping and other investment adviser rules upon registration.

Business Methods and Software Patent Eligibility Saved with Bilski Decision

Thu, 01 Jul 2010 13:01:06 GMT

Insurance and reinsurance companies should be aware of the new Supreme Court decision issued this week which impacts insurer patents and software as they relate to business methods. Please click here to read the advisory for full details and analysis.

Minnesota to Lower Surplus Lines Stamping Fee

Thu, 01 Jul 2010 09:53:41 GMT

The Minnesota Department of Commerce will lower the surplus lines stamping fee from 0.0025 to 0.0008, effective January 1, 2011. The new stamping fee will apply to all surplus lines policies written or renewed after the effective date, and includes all premium bearing transactions on such policies. The purpose of the stamping fee is to fund the operations of the Surplus Lines Association of Minnesota.

Click here to view the official bulletin.

New York Insurance Department Holds Hearing on Reform of Rate, Form, Regulatory Filings and Licensing Applications

Wed, 30 Jun 2010 12:41:04 GMT

On June 28, 2010, the New York Insurance Department (the “Department”) held a hearing to obtain comments from the public regarding how to enhance Department procedures. Comments were invited on the processing of rate and form filings, regulatory filings, and company and producer licensing and renewal applications. Discussion topics also included:

• the potential to increase the use and applicability of the System for Electronic Rate and Form Filing;
• use of revised and updated product outlines or guidelines;
• improved communication regarding product standards;
• methods to improve the post approval review process;
• methods to improve the certified filing process for life insurance products;
• ways to increase the adequacy of Departmental resources;
• prioritizing filings for review based on facts such as multi-state programs and involvement of Rate Service Organizations;
• increasing the scope of “file and use” methodology;
• improved use of the Department’s website to educate and provide meaningful help with filing requirements;
• automatic expedited review of filings having no rate impact; and
• enhanced communication through regulations, circular letters, checklists, guidelines, and/or model contract language to decrease errors in filings and the amount of back-and-forth between the Department and regulated entities.

We will continue to monitor progress in the reform efforts, and will provide timely updates as developments occur.

New York Contemplates Disclosure for Excess Annuity Withdrawals

Wed, 30 Jun 2010 10:20:09 GMT

The New York Insurance Department (“NYID”) prepared a draft circular letter (“Draft Circular Letter” or “Letter”) in early June, which, if finalized and issued, will require insurers to advise consumers of the implications of excess withdrawals from annuities with guaranteed minimum withdrawal benefits (“GMWB”).

A GMWB allows consumers to periodically withdraw a specified guaranteed amount from a contract regardless of the remaining contract value; it can provide lifetime benefits for the contract holder. However, if the contract holder withdraws more than the specified guaranteed amount, the amount of future guaranteed withdrawals will be permanently reduced. According to the Letter, the amount of the permanent reduction is typically calculated as follows:

Guaranteed Withdrawal Amount x Ratio of the Excess Withdrawal to the Remaining Account Balance
(after the reduction for the withdrawal benefit, but prior to the excess withdrawal)

The Draft Circular Letter provides the following example involving a contact with a value of $500, a GMWB of $100, and a withdrawal of $180 (with $80 being the excess over the GMWB amount).

$100 x $80/($500-$100) = 20

The permanent reduction in future periodic withdrawals will be 20%, meaning that the subsequent guaranteed withdrawals will be reduced from $100 to $80.

The NYID is concerned that the reduction in the guaranteed withdrawal amounts can, in some cases, be unfairly disproportionate compared to the amount of the excess withdrawal. Therefore, the Draft Circular Letter requires insurers to provide disclosures explaining the impact of excess withdrawals. These disclosures should be provided to contract holders before contract issuance, and at the time an excess withdrawal is requested.

The Draft Circular Letter has not yet been finalized and issued. We will continue to monitor this topic and provide further updates on InsureReinsure.com.

Click here for a copy of the Draft Circular Letter.

Healthcare News from Capitol Hill and the Department of Health and Human Services – June 28, 2010

Mon, 28 Jun 2010 09:40:58 GMT

In advance of a June 18 deadline for comments, top hospital groups expressed strong opposition to proposed payment cuts issued by the Centers for Medicare and Medicaid Services (CMS). The following week, President Obama announced a set of regulations that will implement various provisions of the recently-enacted healthcare reform law (Public Law 111-148) relating to pre-existing conditions, lifetime coverage limits and other patient protections.

HOSPITALS OPPOSE CMS PAYMENT CUT PROPOSAL:

In its inpatient prospective payment system (IPPS) proposed rule for Fiscal Year (FY) 2011, CMS set forth a proposed 2.9 percent cut to adjust for payments that the agency estimates were made due to coding and documentation changes related to alterations in the Medicare-Severity Diagnosis-Related Groups (MS-DRGs) used in determining IPPS reimbursement amounts. This section of the proposed rule – released in May – would amount to a $3.7 billion cut across the hospital industry in order to recoup a portion of the payments that CMS asserted were made in FY 2008 and FY 2009 due to coding and documentation changes that did not accurately reflect increases in illness severity.

In response to this portion of the IPPS proposed rule, leading hospital groups submitted written comments that reflect strong opposition to the cuts, stating that the methodology used to determine the amount to be recovered was “erroneous.” The groups – including the American Hospital Association, the Federation of American Hospitals, and Premier Inc. – cited an evaluation that found areas of concern in CMS’ methodology, such as the short time period of patient claims data that was used in determining coding adjustments.

The official deadline to comment on the FY 2011 IPPS proposed rule has passed, and CMS is expected to issue a final rule later this summer.

PRESIDENT UNVEILS “PATIENTS’ BILL OF RIGHTS”:

Following a closed-door meeting with state insurance commissioners and leading insurance companies, President Obama and top Administration officials unveiled a set of insurance-related regulations on June 22. The rules – dubbed the Patients’ Bill of Rights – were issued by the Internal Revenue Service, the Department of Health and Human Services’ Office of Consumer Information and Insurance Oversight, and the Department of Labor’s Employee Benefits Security Administration.

The Obama Administration timed the rollout of the regulations to coincide with the 90-day anniversary of the enactment of the healthcare reform measure, and is the latest in a series of recent events designed to emphasize beneficial provisions of the new law.

The rules provide that insurers offering group health insurance and group health plans may not impose coverage exclusions based on pre-existing conditions, and will begin to take effect on September 23, 2010. In addition, the rules will prevent the same insurers and group health plans from establishing lifetime coverage limits on essential benefits, will prohibit recessions in coverage to those individuals, families and groups that are already covered, and would provide further patient protections relating to practices such as premium increases.

NEXT STEPS:

We will continue to monitor Congress, CMS and other relevant federal agencies as the implementation of healthcare reform moves forward and other related matters are considered, and will continue to provide timely updates as new developments occur.

Language on Authority of New Federal Insurance Office Agreed to by Drafters of the House and Senate Financial Reform Bill

Mon, 28 Jun 2010 09:36:40 GMT

Late last week, the House and Senate drafters of the Dodd-Frank Wall Street Reform and Consumer Protection Act (H.R. 4173) came to final compromise on the language creating the first ever office in the federal government that is focused on the insurance industry called the Federal Insurance Office (the "FIO"), housed in the United States Department of the Treasury. The FIO will gather information regarding the insurance industry, will monitor the industry for systemic risks, and will serve as a negotiator for international insurance treaties. Opting for language more closely related to that proposed by the House, last discussed here, the FIO (i) must first seek industry data from state regulators before requesting such data directly from insurance companies and (ii) has the authority to preempt certain state laws it deems in conflict with international insurance agreements, but that such decisions are subject to de novo judicial review.

Click here to view the complete text.

New Hampshire Restricts STOLI Transactions

Mon, 28 Jun 2010 09:27:35 GMT

New Hampshire Governor John Lynch (D) signed HB 660 into law which enacted life settlement legislation in New Hampshire effective June 14, 2010 (the “Act”). The Act is primarily based on the National Association of Insurance Commissioners’ model, and, among other things, imposes restrictions with respect to stranger-originated life insurance transactions (“STOLI”).

The Act defines STOLI, in pertinent part, as:

“…a practice or plan to initiate a life insurance policy for the benefit of a third party investor who, at the time of policy origination, has no insurable interest in the insured. STOLI practices include but are not limited to cases in which life insurance is purchased with resources or guarantees from or through a person, or entity who, at the time of policy inception, could not lawfully initiate the policy himself, herself, or itself, and where, at the time of inception, there is an arrangement or agreement, whether verbal or written, to directly or indirectly transfer the ownership of the policy and/or the policy benefits to a third party. Trusts that are created to give the appearance of insurable interest and are used to initiate policies for investors violate insurable interest laws and the prohibition against wagering on life…”

The Act restricts STOLI transactions by requiring investors to wait at least five (5) years before collecting death benefits under a policy. This restriction only applies to STOLI policies; it does not apply to policies originally purchased for an insurance protection purpose.

In addition to restricting STOLI transactions, the Act also sets forth requirements for the licensing and appointment life settlement providers, the approval of contract and disclosure statements, reporting and privacy, and record retention, among other things.

Click here for a copy of the Act.

Surplus Lines Reform Approved by House/Senate Conferees

Fri, 25 Jun 2010 12:45:45 GMT

Representatives of the United States House of Representatives and Senate attending the reconciliation conference on H.R. 4173, the Wall Street Reform and Consumer Protection Act, have come to an agreement on the streamlined regulation of multistate surplus lines insurance policies.

According to media sources, the agreed upon provision states that with regard to a surplus lines policy covering risks in multiple states, the home state of the insured (i.e., the state of the insured’s principal place of business) shall be the state that governs the policy. Therefore, only the insurance regulator of the insured’s home state will regulate the premium tax allocation, eligibility standards, and diligent search requirements for the particular policy.

The effective date of this provision will be one year from when President Obama signs the bill into law. House and Senate conferees plan to have the reconciled bill finalized by June 28th, with a signing by July 4th.

Financial Reform Conferees Complete Work on Overhaul Legislation

Fri, 25 Jun 2010 11:09:11 GMT

In the early morning hours of June 25, House and Senate conferees completed action on financial regulatory reform legislation (H.R. 4173) by approving a final conference report by a vote of 20-11 among House conferees and a vote of 7-5 among Senate conferees. The votes capped off two weeks of official, publically televised conference negotiations, during which time conferees from the two chambers traded offers and counter-offers, and ultimately agreed upon a final package that combined elements of the two competing versions of H.R. 4173 – the one passed by the House in December 2009, and the one approved by the Senate in May 2010.

Throughout the conference, agreements were reached on provisions such as consumer protection, executive compensation, regulations for hedge funds and credit rating agencies, and systemic risk. Leading up to the final agreement, the most pivotal compromise revolved around the controversial issue of derivatives trading by banks, and was reached after a long day of debate.

Under the derivatives compromise, banks would be able to keep their business in derivatives tied to interest rate swaps, and would also be permitted to continue to trade in derivatives related to foreign exchange swaps, credit, gold and silver, investment-grade credit default swaps and any transaction used to hedge risk. Banks would need to divert derivatives related to commodities, energy, metals, agriculture, equities and below-investment-grade credit default swaps into a separately capitalized entity walled off from federally insured deposits. Any credit default swaps remaining in the bank would go through a central clearinghouse, which will act as a neutral party that guarantees a derivatives trade.

House and Senate conferees also reached a last-minute agreement on another controversial provision – the so-called Volcker rule, which would curb proprietary trading by banks. Under that compromise, banks could not invest more than three percent of their tangible common equity in a hedge fund or private equity firm. In addition, hedge funds and large banks would face a new fee under the conference agreement, in order to generate $19 billion to help offset the costs of the legislation.

Completion of the conference report marks a major step forward in getting the long-awaited legislation to President Obama’s desk before the July 4th holiday, and is also a significant victory for Senate Banking Committee Chairman Christopher Dodd (D-CT), who is retiring at the end of the year. Democratic leaders must now hold their caucus together in order to move the conference report to final votes on the House and Senate floors – steps that are expected to occur next week.

We will continue to monitor this important piece of legislation and will provide updates at InsureReinsure.com.

Second Circuit Affirms District Court’s Decision to Reappoint Arbitrator Who Had Resigned

Thu, 24 Jun 2010 14:01:35 GMT

Yesterday, the Second Circuit affirmed a district court’s decision in which the court held that an arbitrator who had previously resigned was able to rejoin the arbitration panel. Click here to read a copy of the decision. Insurance Co. of N. Am. v. Pub. Serv. Mut. Ins. Co., No. 09-3640-cv (2d Cir. June 23, 2010).

In July 2009, we reported on the judgment of the United States District Court for the Southern District of New York granting the Rule 60(b)(2) motion of Public Service Mutual Insurance Company (“PSMIC”) based on newly discovered evidence that an arbitrator who had resigned from a panel because of illness was, in fact, able to rejoin the panel. The court had previously ruled that the arbitration should begin anew with a new panel, but based on newly discovered evidence, ordered Insurance Company of North America (“INA”) to reappoint the arbitrator who had resigned, or if the arbitrator was unwilling or unable to serve, to direct INA to appoint a replacement or to forfeit that right to the court. Click here to read our July 2009 blog post.

In yesterday’s decision, the Second Circuit affirmed the district court’s decision and rejected INA’s contention that the law in the Second Circuit under Marine Products Export Corp. v. M.T. Globe Galaxy, 977 F.2d 66 (2d Cir. 1992) is that whenever an arbitrator dies or resigns the arbitration panel must automatically be reconstituted anew, finding that this rule does not apply to vacancies resulting from resignations. The appellate court held that application of the rule in that context would create problems that do not arise in the case of vacancies caused by an arbitrator’s death, principally the potential for manipulation by a party that, perceiving itself to be losing, could disrupt the proceedings by pressuring its appointed arbitrator to resign.

The Second Circuit noted that 9 U.S.C. § 5 specifies certain circumstances under which a court may appoint an arbitrator, including the filling of a vacancy on a panel of arbitrators. The court acknowledged the potential unfairness to party where a substitute arbitrator is appointed and tasked with deciding issues about which the original panel members previously heard argument and discussion. However, given the potential for manipulation and waste occasioned by convening a new panel, the appellate court held that this potential unfairness is not sufficiently strong to require application of the Marine Products rule to resignations. Thus, the court affirmed the district court’s decision to reappoint the arbitrator who had resigned or to require a replacement in the event he declined.

China: The People's Bank of China Announce the Renminbi will no Longer be Pegged to the US Dollar

Thu, 24 Jun 2010 09:41:24 GMT

The People's Bank of China (the POBC) announced on 19 June 2010 that the renminbi (RMB) was to exit the peg to the US dollar. China will now determine its exchange rate with reference to a basket of other currencies.

However, hopes for the revaluation of the currency were frustrated, as on 21 June 2010 the PBOC fixed the daily mid-point for the RMB against the US dollar at the same rate as that on the 18 June 2010 (before the announcement). Notwithstanding this, the RMB finished at its highest level against the US dollar since July 2005.

Asia Insurance Review reports that Chinese insurance companies, such as China Life Insurance Company Ltd and Ping An Insurance (Group) Co of China Ltd, should benefit as RMB revaluation is expected to boost China's domestic A-share stocks (which, according to Reuters, account for a large proportion of their investment portfolios). The Financial Times warned, however, that economists expect that China will only allow a gradual revaluation of the RMB against the US Dollar in order that the country's exporters' profits are not harmed.

China: China Regulator Expands Limits on Bond Investment by Insurers

Thu, 24 Jun 2010 09:39:30 GMT

On 26 May 2010, the China Insurance Regulatory Commission (the CIRC) announced that it is considering liberalising current restrictions on investments by People's Republic of China insurance companies in stocks and bonds.

Under the new investment rules, the CIRC will permit insurers to invest up to 20% (up from the current limit of 15%) of total assets in unsecured debt investments. The credit ratings of bonds that insurers are authorised to invest in will be lowered from AA grade to A grade (global rating agency unspecified). Other measures the CIRC is proposing include allowing insurers to invest up to 20% of their assets in securities and equity funds only (previously this limit included bond funds and money market funds, as well as securities and equity funds).

Insurers in China will no longer be restricted to investing only in mainland stocks listed in China. The CIRC proposes to allow insurers to invest in all equity counters listed on the main board of the Hong Kong bourse and may consider permitting insurers to invest in rated corporate bonds issued in Hong Kong.

The CIRC has yet to announce the details and timetable for the implementation of the new investment rules.

Please see our previous blog on this topic here.

UK: Emergency Budget Heralds Insurance Premium Tax Rise

Thu, 24 Jun 2010 09:31:32 GMT

On 22 July 2010 the Chancellor of the Exchequer, George Osborne, presented his emergency Budget. The Budget set out measures to close the UK deficit by 2015-16, several of which will impact directly on the insurance industry.

Insurance Premium Tax (IPT)

The standard rate of IPT will increase to 6% from 5%, taking effect from 4 January 2011. The higher rate of IPT will increase to 20% from 17.5% from that date.

These increases to IPT were described in the Budget as being in line with the announced increase in the rate of VAT, to 20% from 17.5% from January 2011.

Corporation Tax

Companies will benefit from a reduction to the main rate of corporation tax, to 24% from 28%, over the course of four financial years from 1 April 2011, when the first 1% reduction will take effect. The small companies' rate (now known as the small profits rate) of corporation tax will be reduced to 20% from 21%, with effect from 1 April 2011.

Capital Gains Tax

From 23 June 2010, entrepreneurs and individual investors will be affected by an increase in capital gains tax, to 28% from 18% for higher rate tax payers. However, they will benefit from an increase to the lifetime limit for entrepreneurs' relief, to £5 million from £2 million, which will take effect from 23 June 2010. Gains subject to entrepreneurs' relief will continue to be taxed at 10%.

Further information about the Budget 2010 is available at the HM Treasury website here.

Recent Court Rulings on Employer Review of Employees' Electronic Messages – Adjustment to Employer Policies Needed

Wed, 23 Jun 2010 09:28:36 GMT

Two recent cases, one from the U.S. Supreme Court and one from the Supreme Court of New Jersey, suggest that companies need to periodically, if not immediately, update their computer and e-mail policies in order to minimize or prevent litigation when employees use the company's systems for personal messages. Incidental personal use is commonplace, despite the fact that most companies have policies that limit employees' use of the company's communication systems and state clearly that the company may monitor or access employee use of these systems. Implications of these court rulings for employer policies and practices are listed at the end of this Alert.

Please click here to read more.

California Issues Proposed Emergency Regulations to Implement Life Settlement Law

Wed, 23 Jun 2010 09:22:03 GMT

This updates our October 19, 2009, and our May 7, 2010 blog posts.

On June 11, 2010, the California Insurance Department issued proposed regulations, on an emergency basis, to implement Senate Bill 98 (“SB”), which repealed existing viatical settlement statutes and enacted life settlement statutes. See our October 19, 2009 blog posting for a description of SB 98. SB 98 is set to take effect July 1, 2010.

The proposed regulations implement SB 98 by, among other things:

1.      Defining procedures for licensing life settlement providers and brokers;

2.      Providing specific forms for provider and broker applications, consumer disclosures, and a suggested provider verification of coverage form;

3.      Defining procedures for the grandfathering in of viatical settlement providers and brokers for a new license;

4.      Defining procedures for filing life settlement forms with the Commissioner prior to use;

5.      Prescribing records maintenance requirements for providers and brokers; and

6.      Implementing SB 98’s requirement for providers to file an annual statement.

Click here for the Notice of Proposed Emergency Action.

Click here for the proposed regulations.

Massachusetts Court Reaffirms General Liability Insurers’ Broad Duty to Defend

Tue, 22 Jun 2010 10:15:49 GMT

The Massachusetts Appeals Court recently reaffirmed that jurisdiction’s broad understanding of a general liability carrier’s duty to defend, holding that an insurer had a duty to defend against a claim of trespass first asserted after the expiration of its policy period. Porter v. Clarendon Nat’l Ins. Co., No. 09-P-964 (Apr. 26, 2010) (click here for a link to the slip opinion).

The insured was 1915 Beacon Street Condominium Trust. As its name implies, it owned a residential condominium building in the congested Boston suburb of Brookline. It purchased general liability policies from Greater New York Insurance Company (2000-01), Clarendon National Insurance Company (2001-03), and Vermont Mutual Insurance Company (2003-07).

At some point before the inception of Greater New York’s policy, the trust built a retaining wall and two parking spaces, presumably for the use of its building’s residents. In September 2004, the abutting property owner demanded that the trust remove the wall and the parking spaces, claiming that they impermissibly encroached on the abutter’s parcel. The trust refused, asserting that it had been using the disputed space since 1983 and had title to the land through adverse possession. The abutter sued in November 2004, alleging “continuing trespass” in its complaint. Vermont Mutual accepted the tender and defended the suit, settling it for $27,500 in March 2007.

Vermont Mutual demanded that Greater New York and Clarendon contribute to the defense of the underlying claim. They refused, arguing that the claim for trespass accrued only from September 2004 and, therefore, did not occur during their policy periods. They also asserted that the “your work” and “your property” exclusions barred coverage. The Norfolk County Superior Court granted summary judgment to Greater New York and Clarendon.

The appeals court reversed. Reviewing Massachusetts law, the appeals court noted that a general liability carrier had a duty to defend if the allegations in a third-party action were “reasonably susceptible of an interpretation that they state or adumbrate a claim covered by the policy terms.” The court construed the broad continuous trespass allegation in the complaint as stating a claim for negligent trespass dating back to before the inception of the Greater New York policy in 2000. The court specifically noted that a claim for intentional trespass could reasonably be construed to “adumbrate a claim for negligent trespass,” which would fall within the scope of coverage.

The court further found that the carrier’s asserted exclusions were inapplicable. The “your property” exclusion, the court wrote, is included in liability policies to prevent them from being converted into first-party policies. The damage asserted by the abutter, though, was damage to a third party and, therefore, fell within the scope of coverage. It also found that the “your work” exclusion was inapplicable, because the complaint sought damages for tort – not for work that it had contracted with the trust to perform.

The court’s decision reaffirmed the broad reading that Massachusetts law gives to a liability insurer’s duty to defend.

Eleventh Circuit Upholds That D&O Policy Does Not Provide Coverage for Claims Arising Out of Property Damage Under Florida Law

Tue, 22 Jun 2010 10:05:53 GMT

In an unpublished opinion, the Eleventh Circuit recently affirmed the trial court’s decision that a D&O policy does not provide coverage for third-party property damage claims. Eastpointe Condominium I Association, Inc. v. Travelers Cas. & Sur. Co. of America, No. 09-15866 (11th Cir. May 20, 2010). A copy of the decision can be found here.

The Insured owned and operated a condominium complex in Singer Island, Florida. It had purchased general liability coverage from the GL Insurer and a directors and officers policy from the D&O Insurer. The D&O policy contained a property damage exclusion, barring coverage for loss in connection with any claim made “for or arising out of any damage, destruction, loss of use or deterioration of any tangible property including…mold, toxic mold, spores, mildew, fungus, or wet or dry rot.”

According to the decision, in October 2004, two hurricanes struck South Florida, and the Insured’s complex sustained serious damage from heavy water intrusion, which in turn bred pervasive mold that damaged the building’s residential units. One of the unit owners sued the Insured, claiming that its failure to maintain and repair the roof and air conditioning system before, between, and after the two storms constituted negligence, breach of contract, and breach of fiduciary duty.

The GL Insurer accepted the Insured’s tender under reservation of rights. The D&O Insurer, citing the property damage exclusion, refused and disclaimed any duty to defend. The Insured secured independent counsel and, together with the lawyer appointed by the GL Insurer, obtained a complete defense verdict at the trial of the unit owner’s action.

The Insured then sued the D&O Insurer for declaratory judgment and breach of contract, seeking to recover the attorneys’ fees it paid in the underlying suit. The D&O Insurer moved for summary judgment, arguing that the sole basis for the underlying lawsuit was water damage to the condominium property that resulted in leaking, mold, and loss of use to the owner’s unit. After a hearing, the US District Court for the Southern District of Florida granted the D&O Insurer’s motion, holding that the “underlying claim arose out of damage or destruction to tangible property” and therefore, fell within the property damage exclusion. The D&O Insurer had no duty to defend.

The Eleventh Circuit affirmed, in a per curiam order. Applying Florida law, the court wrote that the “language of the policy is the most important factor” in construing insurance contracts and that it was essential to give effect to the plain meaning of that language. It quickly dismissed the Insured’s argument that there was a difference between losses originating from property damage and losses originating from breaches of fiduciary duty, that ultimately result in property damage. Noting that the Florida Supreme Court has construed the “arising out of” language appearing in the D&O policy’s property damage exclusion quite broadly, it found that the exclusion covered the damage alleged in the underlying complaint. The court stated that the underlying suit depended upon the existence of the property damage and, therefore, fell outside the D&O policy’s coverage.

China: China Insurance Regulatory Commission in Call for Insurers to Develop E-Insurance

Tue, 22 Jun 2010 09:14:43 GMT

Domestic insurers in China are being encouraged by the China Insurance Regulatory Commission (the CIRC) to grow new business through electronic commerce in order to optimize the structure of sales channels and foster the growth of new business.

Mr Li Kemu, CIRC Vice-Chairman, stated that insurers needed to combine various communication media, such as the internet, telephone and short messaging service, to develop product sales and promotion, online sales and customer service and enhance their overall insurance service.

According to the CIRC, at the end of 2009, China had 32 insurance companies that used the internet as a sales channel, and another 36 insurance companies that ran telemarketing operations. E-insurance sales in China represented just 1% of the total premiums revenue of RMB1.11 trillion of the insurance industry (including life).

Hong Kong: General (Non-Life) Insurance Industry's Q1 Gross Premiums Grow 16.2%

Tue, 22 Jun 2010 09:10:34 GMT

The Office of the Commissioner of Insurance in Hong Kong has announced that in Q1 of 2010, gross premiums for general (non-life) insurance business grew 16.2% to HK$9.2 billion and net premiums grew 14.4% to HK$6.5 billion compared to Q1 of 2009. However, overall underwriting profits declined from HK$694 million to HK$559 million.

Gross direct business premiums grew 6.9% (6.4% net) compared to Q1 of 2009. However, underwriting profits for direct business dropped from HK$483 million to HK$383 million as overall claims experience worsened in Q1 of 2010.

Gross premiums for reinsurance inward business increased from HK$1.4 billion to HK$2.3 billion (HK$786 million to HK$1.3 billion net). Total insurance benefits paid to individuals also grew by 3.4% to HK$14.7 billion.

Further details are available by clicking here.

UK: Brokers Welcome One New Regulator

Tue, 22 Jun 2010 09:05:59 GMT

The British Insurance Brokers' Association (BIBA) has welcomed the planned creation of a new Consumer Protection & Markets Authority, which was announced by UK Chancellor, George Osborne, at his Mansion House speech on 16 June 2010 (see our previous blog here).

"We are pleased that insurance intermediaries appear to be falling under the scope of one new regulator," said BIBA's Chief Executive, Eric Galbraith.

BIBA also called for cost effective regulation and drew attention to the high level of fees faced by UK insurance brokers, which were described as "totally out of line with the rest of Europe," by BIBA's Head of Compliance and Training, Steve White.

The BIBA press release can be found here.

House and Senate Conferees Close on Establishing Federal Insurance Office; Include State Insurance Regulator on Financial Stability Oversight Council

Mon, 21 Jun 2010 15:23:11 GMT

With only a few key differences to overcome, the House and Senate have hammered out several points regarding the creation of an office to monitor the insurance industry as part of the currently debated financial industry reform bill. According to media sources: (i) the office will be located in the United States Department of the Treasury; (ii) it will be called the Federal Insurance Office (the “FIO”); (iii) it will work closely with the U.S. Trade Representative to secure international insurance agreements regarding prudential matters; (iv) it will be required to consult with relevant congressional committees regarding those international agreements; and (v) it will have the authority to collect market information from insurers - but only after first determining if it can get that information from other sources.

Still to be determined are whether de novo judicial review of decisions by the FIO should be granted and the amount of authority the FIO should have in preempting state law when becoming signatories to international insurance agreements. With de novo judicial review, the federal court would not grant the FIO the deference typically accorded to an administrative agency and require automatic judicial review of FIO state-law preemption decisions. Proponents of de novo judicial review believe that it will provide the necessary safeguards for maintaining the current state-based insurance regulatory system. Opponents believe that it could hinder the FIO’s decision-making capabilities.

Systemic Risk Council

The National Association of Insurance Commissioner (the “NAIC”) scored a win in the latest debate regarding the Financial Stability Oversight Council (the “FSOC”). Media sources have reported that House and Senate negotiators have agreed that a state insurance commissioner will have a nonvoting seat on the FSOC. This is in accordance with a letter the NAIC sent to congressional leaders earlier this month.

Opposing inclusion of an insurance industry representative on the FSOC is the National Association of Mutual Insurance Companies (the “NAMIC”), which believes that since the insurance industry is not systemically risky, the insurance industry should avoid any association with systemic risk regulation. According to Matt Brady, NAMIC spokesperson, inclusion on the FSOC, “creates sort of the implicit mandate to find a reason to sort of bring an insurance company into that. At some point, somebody’s going to have to ask why they are there.”

Rhode Island Imposes Readability Standards for Health Insurance Policies

Mon, 21 Jun 2010 13:20:44 GMT

Effective August 31, 2010, the Rhode Island Office of the Health Insurance Commissioner (“OHIC”) will impose a readability requirement for all health insurance policies to be readable at the eighth grade level measured by the Flesch-Kincade formula. The readability requirement comes in response to Rhode Island’s low adult literacy rate, and is designed to protect consumers by making health insurance policies, which are often complicated, easy to understand.

The OHIC has established specific readability standards for group and individual policy forms, contracts, certificates or agreements delivered, issued for delivery or renewed in Rhode Island. Policies failing to meet the requirements will not be approved. In establishing the standards, the OHIC recognized that certain policy terms may be impossible to restate in simplified language (e.g. medical terminology); as such, companies will not be penalized for using such terms. Riders, endorsements, applications and other forms may be scored under the Flesch-Kincade formula as separate forms, or as part of the policy with which they are used. Policy forms must be accompanied by an officer’s certificate from the insurer setting forth the Flesch-Kincade grade score. The OHIC may authorize a higher reading standard under certain circumstances.

Click here for a copy of the regulation imposing readability standards.

Chile: International Insurers Raise Loss Estimates

Mon, 21 Jun 2010 09:18:34 GMT

Insurers and reinsurers are continuing to revise upwards their loss estimates for the Chile earthquake which struck on February 27, with industry totals now surpassing $6 billion.

Swiss Re recently announced its latest estimate of $630 million, up from its previous estimate of $500 million, and said the figure could rise further. Munich Re said its loss estimate after retrocession and before tax had risen to $1 billion, up from $700 million. It said this was based on an overall market loss of $8 billion, compared with previous estimates of $4 to $7 billion.

Last month, Lloyd's of London gave its estimate of net claims from the earthquake at $1.4 billion. Other (re)insurers with high loss estimates include the Berkshire Hathaway group, with $500 million from the Chile earthquake and other first quarter wind losses, and AIG, with $310 million. Validus Holdings of Bermuda said in its 8-K filings with the Securities and Exchange Commission its estimate was $293 million, higher than its original range of $170 to $270 million.

Munich Re said that reliable forecasts had been difficult until now because of low primary insurer retentions, ongoing business interruption losses, and a high proportion of individually reinsured production facilities and buildings. It said that the number of individual losses was very high, with local insurance companies receiving more than 190,000 losses by the end of April.

The magnitude 8.8 earthquake occurred off the coast of Chile on February 27 and is believed to have killed more than 500 people.

Hong Kong: Launch of Yuan-Denominated Policies in Hong Kong

Mon, 21 Jun 2010 09:16:02 GMT

In order to tap investor expectations of a rising yuan (RMB), insurers are preparing to launch yuan-denominated policies as a new product offering for insurers in the Hong Kong market. Insurance premiums make up almost 10% of Hong Kong's GDP, compared with just 3% of China's GDP.

The move could provide a long-term growth opportunity for insurers active in Hong Kong, although it may also create secure asset-liability mismatch issues for the companies. Reuters suggests that the launch of yuan-denominated policies may also raise the question of whether insurance could be used as a vehicle for unnecessary speculation.

The biggest downside to the development of new products is the lack of investment options for yuan holders, a reality that could leave insurers with a large amount of yuan collected as premiums but with nowhere to invest it. Yuan products are highly limited for non-Chinese nationals and companies at present, as Chinese securities and debt markets are closed to them.

Hong Kong has become the centre for a number of Beijing's experiments with the yuan as it takes steps towards its ultimate aim of placing the yuan alongside the US dollar as one of the world's preferred reserve currencies.

China: Lloyd's China Granted Licence to Write Direct Insurance

Fri, 18 Jun 2010 11:27:50 GMT

The China Insurance Regulatory Commission (the CIRC) has granted Lloyd's China a licence to write direct insurance. This is in addition to Lloyd's China's existing reinsurance licence (granted in March 2007). The announcement was made by Lord Levene, chairman of Lloyd's, on 19 May 2010 at the UK Pavilion at the World Expo in Shanghai.

Lloyd's will now begin work on making its new direct licence operational, a process that Lloyd's suggests may take up to a year and will involve converting Lloyd's Reinsurance Company (China) Ltd into a direct insurance company. Lloyd's, in making its new direct licence operational, intends to work closely with the Chinese insurance market, the CIRC and other Chinese authorities to ensure its direct operation complies with the relevant regulations in China.

The International Association of Insurance Supervisors (IAIS) Publishes a Position Statement on Key Financial Stability Risks in Insurance

Fri, 18 Jun 2010 11:20:15 GMT

The IAIS has recently published a position statement analysing the potential for financial instability in the insurance sector. To view the position statement, please click here.

The IAIS concluded that there was little evidence of insurance generating or amplifying systemic risk within the financial system or the real economy. However, the IAIS has recognised that there are circumstances where insurers may amplify risk, for example where life insurers react to downturns in equity markets or real economy is disrupted through the unavailability of certain insurance products. Non-regulated entities of financial conglomerates and certain insurance activities, such as financial guarantee insurance, may also generate or amplify systemic risk.

The IAIS considers that an effective regime of regulation and supervision can mitigate these possibilities. However, because interdependencies between the sectors may increase in the future via conglomerates, markets and products, the IAIS is promoting improvements to supervision and supervisory processes, combined with stronger risk management and enhanced approaches to resolve and minimise averse external factors. These improvements include:

• group-wide supervision and the development of a common framework for the supervision of internationally active insurance groups, which was previously announced by IAIS in January 2010 (please click here to view the IAIS's press release);

• promotion of cross-sectoral macro-prudential monitoring of potential build-up of systemic risk; and

• development of measures for national authorities to assess degrees of systemic risk.

UK: The Financial Ombudsman Service Publishes Payment Protection Insurance Case Studies

Fri, 18 Jun 2010 09:43:17 GMT

The Financial Ombudsman Service (the FOS) has recently published eight short case studies to help firms understand how complaints about sales of payment protection insurance (PPI) will be assessed. The case studies are available on the FOS website. Please click here to view the case studies.

The case studies are designed to highlight the approach of the FOS, and the issues it considers, when assessing complaints about advised and non-advised sales of PPI.

Please click here to view other blogs on PPI.

State Insurance Commissioners Make Their Case for Inclusion in the Financial Stability Oversight Counsel

Fri, 18 Jun 2010 09:39:15 GMT

In a letter from the National Association of Insurance Commissioners (the “NAIC”) to both House and Senate leaders, state insurance commissioners urged lawmakers to designate a non-voting seat for state banking, insurance and securities regulators on the Financial Stability Oversight Council (the “FSOC”).

NAIC President and West Virginia Insurance Commissioner, Jane L. Cline, stated in a press release that the FSOC will be a regulatory body, which “demands the commitment, expertise, and regulatory data that only an active state insurance commissioner can bring.” Further, according to Ms. Cline, “the inclusion of a state insurance regulator will aid considerably as an early warning system in identifying practices and risk-related trends that contribute to systemic risk.”

Federal Insurance Office

The NAIC’s letter also expressed support for inclusion of the House’s Federal Insurance Office (“FIO”), last discussed here, rather than the Senate’s Office of National Insurance (“ONI”), last discussed here, in the final reconciled financial reform bill. According to the NAIC, the laws establishing such an office, housed in the U.S. Department of the Treasury, would (i) provide the federal government with information and expertise on the insurance sector, (ii) ensure that international agreements are subject to appropriate review and input, and (iii) protect against unnecessary preemption of state law. According to the NAIC, the House’s FIO has limited preemptory powers that are “only as broad as necessary to achieve the narrow objectives of the office [with] appropriate procedural safeguards . . . in place to protect against any broadening of that preemptive effect.”

Consumer Protection Agency, Resolution Authority, and Proprietary Trading

The NAIC’s letter also made the case for why the House version’s consumer protection agency should not regulate the areas of federal law that affect insurance companies (e.g., the Gramm Leach Bliley Act), for why insurers should be excluded from the systemic resolution authority as insurance consumers are already protected by the state guaranty fund system, and why any new rules set forth in the final reform bill should allow insurers to continue to invest policyholder premiums in accordance with state investment laws.

European Commission Consults on Short Selling

Fri, 18 Jun 2010 09:32:24 GMT

On 14 June 2010, the European Commission published a consultation document on the options for dealing with short selling. We have reported previously on the CESR report on short selling published in March 2010 (click here for our post). The European Commission consultation draws heavily from that report. The consultation covers:

- whether the same rules should be applied to every type of traded financial instrument that can be the subject of short selling
- whether the CESR approach on transparency in relation to short selling should be applied only to EU shares and sovereign bonds, or to all financial instruments traded in the EU
- whether uncovered (or 'naked') short selling should be subject to a condition that the seller has entered into a borrowing agreement
- whether market making activities should be exempt
- whether competent authorities in each jurisdiction should have the power to place restrictions on short selling or credit default swaps in an emergency

The consultation is open until 10 July 2010. Click here to read the consultation document.

UK Chancellor Sets Out Proposals for Reform of Financial Services Regulation

Thu, 17 Jun 2010 09:46:47 GMT

In the annual Mansion House Speech on 16 June 2010, the UK Chancellor announced his intention to abolish the tri-partite system of financial regulation established by the former Labour government. The new regime to be introduced will feature a new prudential regulator for financial firms including banks, building societies and insurers, which will be a subsidiary of the Bank of England and a new Financial Policy Committee of the Bank of England to oversee macro prudential and economic issues - described by Mervyn King, Governor of the Bank of England, as the "twin peaks" model.

In addition, a new Consumer Protection and Markets Authority is to be established, which will regulate the conduct of every authorised financial firm providing services to consumers.

The process is expected to be completed in 2012.

Hector Sants, chief executive of the FSA, who had previously announced that he would step down from the FSA in the summer, has agreed to remain at the FSA to oversee the transition and will become the first new deputy governor and chief executive of the new prudential regulator. Andrew Bailey, at the Bank of England will lead its transition team and will become Sants' deputy at the new regulator.

In common with most statements on financial regulation in the past two years, little mention was made of the insurance industry in either the Chancellor's speech or that of Mervyn King.

The Financial Secretary to the UK Treasury, Mark Hoban, will set out more details in a speech to Parliament on 17 June 2010.

UK: The Association of British Insurers Consults on Statement of Best Practice for Critical Illness Cover

Thu, 17 Jun 2010 08:49:40 GMT

The Association of British Insurers (the ABI) has recently published a consultation paper on its statement of best practice for critical illness cover. Please click here to view the consultation paper. The ABI originally published the statement in 1999 following a report by the Office of Fair Trading on health insurance. The aim of the statement is to ensure that customers continue to get meaningful, understandable and affordable critical illness cover that meets their needs. The ABI reviews the statement every three years to ensure that it continues to meet its objectives and that the standard medical definitions and other provisions remain appropriate.

The consultation paper builds on the proposals that emerged from the ABI's review of the statement in 2009. In particular, it outlines the ABI's proposed new name for "Total Permanent Disability", which is "Irreversible Life-changing Disability", and the proposed new standard definition. It also sets out the final revised definitions for cancer, Parkinson's disease and terminal illness and introduces a standard wording for the pre-existing conditions exclusion used in children's critical illness cover. The ABI has noted that insurers are free to adopt these definitions from now on. Alternatively, insurers can wait to adopt them together with the other revised provisions that will be included in the final revised statement. The final revised statement is expected to be published during the summer.

Comments can be made on the ABI's proposals until 30 June 2010.

EU: European Advocate General Opinion Concludes No Privilege for In-house Lawyers

Thu, 17 Jun 2010 08:46:09 GMT

On 29 April 2010, European Advocate General Kokott gave her opinion in the case of Akzo Nobel Chemicals Ltd & Akcros Chemicals Ltd v European Commission. She was asked to consider whether "the protection of communications between lawyers and their clients ('legal professional privilege'), guaranteed as a fundamental right under the law of the European Union, also extended to internal exchanges of opinions and information between the management of an undertaking and an 'enrolled in-house lawyer' employed by that undertaking?"

The case sprung from a search carried out by the European Commission, in its role as competition authority, of the business premises of Akzo Nobel Chemicals (Akzo) and Akcros Chemicals Ltd (Akcros). During that search, the Commission's representatives took copies of several documents which Akzo and Akcros claimed were subject to legal professional privilege including two emails between the general manager of Akcros and an employee of that company's in-house legal team. The employee in question was a member of the Netherlands Bar. The two companies involved brought proceedings to challenge the seizure and use of these documents on the basis that the communications were subject to legal professional privilege. They were unsuccessful at first instance and the matter is now pending appeal. The opinion of the Advocate General is not binding on the appeal court however such opinions are usually followed.

Ms Kokott's opinion largely followed the European Court of Justice's (ECJ) decision in AM & S v Commission [1982] ECR 1575 in which the ECJ identified two necessary criteria in order to rely on the protection afforded by legal professional privilege. First, there must be a communication in connection with the client's rights of defence; and, second, the communication must be with an independent lawyer (i.e. a lawyer who is "not bound to the client by a relationship of employment"). The Advocate General relied heavily, when making her decision, on the presumption that an in-house lawyer was unable to deal effectively with any conflicts of interest between professional obligations and the wishes of his client (i.e. his employer). This, she stressed, was partially due to the fact that an in-house lawyer is economically dependant on the employer in a way that independent lawyers are not. She also stressed the importance of having a community-wide rule regarding legal professional privilege as different Member States treated in-house lawyers differently. She concluded that communications with enrolled in-house lawyers were not protected by legal professional privilege.

If the appeal court follows the Advocate General's opinion then corporate entities will have to be extremely careful about the advice they seek from their in-house counsel. Such communications may not be protected by legal professional privilege in matters under the jurisdiction of the European courts.

The appeal is due to be decided later this year. If you would like the read the Advocate General's opinion in full please click here.

UK: High Court Refuses Compensation for Exaggerated Claim

Thu, 17 Jun 2010 08:38:03 GMT

In Farid Yeganeh v Zurich Plc and Zurich Insurance Company 2009 Folio 244, the High Court found that Zurich did not have to pay any compensation to Mr Yeganeh as he had breached a condition of his insurance policy by making fraudulent claims for property lost in a house fire.

A fire caused extensive damage to the upper floor of Mr Yeganeh's house in September 2007. As a result Mr Yeganeh made a claim on his insurance policy with Zurich. This policy contained General Condition 4 which required Mr Yeganeh to "do all you can to prevent and reduce any costs, damage, injury or loss" and stated that "if a claim is fraudulent or false in any way, [Zurich] will not make any payment and all cover will end". After considering the claim, Zurich refused to pay out any compensation as "the fire was fortuitous so far as Mr Yeganeh is concerned and was caused deliberately either by him or someone acting on his behalf". Furthermore, they stated that "Mr Yeganeh has lied in the claims process to exaggerate his claim and this was in breach of General Condition 4 and in breach of the general duty of utmost good faith".

The court was asked to consider whether firstly Mr Yeganeh had started the fire deliberately, and secondly whether he had made a false claim as to the items lost in the fire. Regarding the cause of the fire, Judge Mackie QC noted that it was for Zurich to show that Mr Yeganeh had started the fire deliberately, and that it must bring clear evidence for this given the seriousness of the allegation. Despite expert evidence suggesting that arson was a possibility, the court found that Zurich could not provide the conclusive evidence required to show that Mr Yeganeh deliberately started the fire. However, despite the fact that Mr Yeganeh clearly did lose some property as a result of the fire, the court found discrepancies in his evidence and found that he made claims for property that was not in the house at the time of the fire, such as designer suits.

As a result, the court allowed Zurich's defence on the basis that Mr Yeganeh had breached General Condition 4 of the insurance contract by making a false claim for the clothing contents. Mr Yeganeh's entire claim therefore failed and no compensation was owed, even for property that had been genuinely damaged in the fire.

UK: The Financial Services Authority Introduces Temporary PPI Rule

Thu, 17 Jun 2010 08:34:17 GMT

The Financial Services Authority (the FSA) has recently announced a temporary rule which will allow customers with complaints about the purchase of a payment protection insurance (PPI) policy more time within which to refer it to the Financial Ombudsman Service (the FOS). This temporary rule has been introduced without consultation. Please click here to review the FSA's press release.

Normally, under the FSA's rules, the FOS cannot consider a complaint referred to it more than six months after the date on which the firm sent the customer its final response to the complaint. However, the new temporary rule suspends this existing six month time limit. The temporary rule is contained in the Dispute Resolution: Complaints sourcebook and will be effective for five months (expiring on 27 October 2010). The temporary rule will apply to those customers who received a final response from a firm between 28 November 2009 and 28 April 2010.

The FSA has noted that this action has been taken to ensure that recent PPI complainants are not disadvantaged by a time bar while the FSA works to find a long term solution to ensure that customers of PPI policies are treated consistently and fairly when complaining about the sale of a PPI policy, or when buying a new one.

Please click here to review an earlier blog on PPI reforms.

UK: New Government Confirms Labour's Pleural Plaques Decision

Thu, 17 Jun 2010 08:30:18 GMT

MP Jonathan Djanogly, Parliamentary Under-Secretary of State at the Ministry of Justice, has confirmed to Parliament that the new Government will not seek to overturn the House of Lords' decision that asymptomatic pleural plaques were not compensatable. He also confirmed that the Government would "proceed with the implementation of the previously announced limited extra-statutory scheme to provide one-off payments to individuals who had begun, but not resolved, a legal claim for compensation for pleural plaques at the time of the House of Lords judgment." As previously reported here, these payments, originally announced by Jack Straw earlier this year, allow for a one off payment of £5,000 to qualifying claimants. Mr Djanogly explained that the Government was hoping to begin making these payments by the end of June.

Pennsylvania Federal Court Dismisses Bad Faith Claim as Subsumed by Breach of Contract Claim, But Allows Statutory Bad Faith Claim

Thu, 17 Jun 2010 08:27:16 GMT

Recently, a Pennsylvania federal court dismissed a bad faith claim against an insurer on the grounds that the claim was subsumed by the plaintiff’s breach of contract claim in the same proceeding. Fingles v. Continental Cas. Co., No. 08-CV-05943 (E.D.Pa. April 28, 2010). Please click here to read a copy of the court’s decision.

In Fingles, the executor of the estate of a decedent, who had been an insured of the defendant under a long-term care insurance policy, had engaged in a number of disputes regarding the insurer’s handling of the decedent’s claims for coverage. The executor filed a complaint against the insurer that included a number of claims related to the defendant’s claims handling, including claims for breach of contract and bad faith.

On the insurer’s motion, the court dismissed the claim for bad faith based in contract. The court cited a number of decisions holding under Pennsylvania law that a claim for bad faith breach of a contract must be prosecuted as a breach of contract claim, and that the implied covenant of good faith and fair dealing does not allow for a claim separate and distinct from a breach of contract claim.

As to the cause of action for statutory bad faith for violation of the Pennsylvania Unfair Trade Practices and Consumer Protection Law (“UTPCPL”), the court held the plaintiff alleged more than a mere denial of a claim or nonfeasance, but rather alleged malfeasance sufficient to satisfy the “deceptive conduct” prong of the statute. Thus, the court dismissed the bad faith claim based on breach of contract on the grounds it was subsumed within the breach of contract, and dismissed a count based on alleged fraudulent conduct as inadequately pleaded, but allowed the UTPCPL claim to survive.

Rhode Island 2011 Budget - Tax Implications for Surplus Lines Insurers and Medical Malpractice Joint Underwriters Association

Wed, 16 Jun 2010 15:10:08 GMT

The 2011 Rhode Island state budget, which was enacted as HB 7397A and signed into law June 2, 2010, amends the taxation statutes applicable to surplus lines insurers and the Medical Malpractice Joint Underwriters Association. Article 9 of HB 7397A contains both amendments.

HB 7397A increases the tax rate on surplus lines insurance from three percent (3%) to four percent (4%) of gross premiums. The one percent (1%) increase brings the Rhode Island surplus lines tax rate in line with the rates imposed by neighboring states Massachusetts and Connecticut. It is unclear at this time whether this increase will result in a similar increase to the tax rate on insurance obtained through direct procurement, which is currently taxed at a rate of three percent (3%) of gross premiums.

HB 7397A also imposes Rhode Island’s two percent (2%) tax on gross insurance premiums to the Medical Malpractice Joint Underwriters Association, which had previously been exempt from the tax.

To view Article 9 of HB 7397A, click here.

UK: Commercial Court Upholds Tribunal Award Limiting Recovery Under Business Interruption Policy

Wed, 16 Jun 2010 10:49:08 GMT

The Commercial Court has upheld an arbitration award on business interruption insurance that used a "but for" approach to causation with the effect of limiting recovery by the insured.

In the recent decision of Orient-Express Hotels Limited v Assicurazioni Generali SpA [2010] EWHC 1186 (Comm), Mr Justice Hamblen dismissed an appeal by the insured against an arbitration tribunal's decision that it was only able to recover business interruption losses consequent upon damage to the hotel itself. The claimant, Orient-Express Hotels Limited (OEH), was the owner of a hotel in New Orleans which suffered property damage and consequential losses following Hurricanes Katrina and Rita in autumn 2005. The hotel closed for two months and as New Orleans was subject to a mandatory evacuation order, the city itself was effectively closed for part of the period.

OEH's business interruption policy covered "loss due to interruption or interference with the business directly arising from damage." The arbitrators held that this provided cover only for losses caused by damage to the hotel itself, but not for losses caused by damage to the surrounding area that would have forced the hotel to close anyway. They said the policy wording required a "but for" test to be applied, ie only losses which "but for" the damage to the hotel would have been earned by OEH could be claimed. Under the hypothetical situation where the hotel was not damaged but the surrounding area was, OEH was not able to show that it would have had any significant earnings and so was not able to claim for these. Hamblen J confirmed that the "but for" test was a necessary condition for establishing causation in fact in these circumstances, but said there might be cases in which "fairness and reasonableness" required otherwise.

Hamblen J also upheld the tribunal's decision on the "trends" clause of the policy under which loss adjustments were to be made "to provide for the trend of the Business and for ... special circumstances affecting the Business ... which would have affected the Business had the Damage not occurred..." The arbitrators held that the hurricanes counted as "special circumstances" and so the business interruption losses should be adjusted to take account of the damage to the surrounding area, which would have impacted on the hotel's earnings independently of the damage to the hotel itself.

The full judgment can be seen by clicking here.

Second Circuit: Distinguishing Between Policy Definitions Subject to NY Insurance Law § 3420(d)(2)’s Timely Disclaimer Requirement as an Exclusion and Those That Are Not

Wed, 16 Jun 2010 10:38:46 GMT

In a decision issued on February 1, 2010, the United Stated Court of Appeals for the Second Circuit confirmed that under New York law some policy provisions, although placed outside of the policy's “Exclusions” section, may nonetheless be considered an exclusion and, therefore, subject to the timely disclaimer and denial requirement of NY Insurance Law § 3420(d)(2). NGM. Ins. Co. v. Blakely Pumping, Inc., 593 F.3d 150 (2d Cir. 2010). However, the court did uphold the insurer's denial of coverage.

NY Insurance Law § 3420(d)(2) requires that, with respect to liability policies issued or delivered in New York, “an insurer…disclaim liability or deny coverage for death or bodily injury…occurring within this state, …[by] giv[ing] written notice as soon as is reasonably possible of such disclaimer of liability or denial of coverage to the insured and the injured person or any other claimant.”

The dispute in this case arose when an executive of the insured company was involved in an auto accident, causing injuries to a third party. The injured party sued the driver and the company, as the driver was using the car in the course of his work for the company. The driver and the insured company both sought defense and indemnity coverage under a "Business-owners Liability Coverage.” Although the policy covered liability for personal injuries, its “Exclusions” section which barred coverage for damages “arising out of the ownership, maintenance, use or entrustment to others of any ... ‘auto’ ... owned or operated by or rented or loaned to any insured.”

However, the policy also included an endorsement extending coverage to bodily injury arising from the use of a “Hired Auto” or a “Non-Owned Auto” by the company or one of its employees. “Hired Auto” was defined as “any ‘auto’ you lease, hire or borrow. This does not include any ‘auto’ you lease, hire or borrow from any of your ‘employees’ or members of their households, or from any partner or “executive officer’ of yours.” “Non-Owned Auto” was defined as “any ‘auto’ you do not own, lease, hire or borrow which is used in connection with your business.”

The insurer timely disclaimed coverage under the exclusion. In response, the insured raised the endorsement as potentially applicable. It was only then that the insurer also disclaimed coverage under the endorsement, on grounds that the driver was an executive officer of the insured and, therefore, his car was neither a “Hired Auto” nor “Non-Owned Auto” as defined in the endorsement.

The insurer subsequently commenced suit, seeking a declaratory judgment that it was not obligated to defend the insured or its employee in connection with the underlying personal injury lawsuit. The district court ruled in favor of the insured, holding that the insurer did owe defense and indemnity, on the grounds that the endorsement’s definition of the terms "Hired Auto" and "Non-Owned Auto" constituted exclusions from general coverage, thereby triggering the timely disclaimer and denial requirement of § 3420(d)(2). As the insurer initially disclaimed coverage based solely on the policy's auto exclusion, the court ruled that it had "waived" its right to disclaim coverage on other grounds. The court thus concluded that the insurer’s subsequent notice of disclaimer under the endorsement was invalid.

The Second Circuit reversed, however, holding that the endorsement’s definition of “Hired Auto” and “Non-Owned Auto” were not exclusions, and therefore did not trigger the timely disclaimer or denial requirement of § 3420(d)(2). In that regard, the court stated that "[d]etermining whether there is no coverage by reason of exclusion as opposed to lack of inclusion can be 'problematic.'"

The court further noted:

The Endorsement did not generally cover auto accidents; it covered only accidents arising from the use of a "Hired Auto" or "Non-Owned Auto." Those terms were defined in such a way that an employee's or officer's vehicle, like Blakely's pickup truck, could never be covered. This is not a case then where "the happening of a subsequent event" implicated a definitional term that "uncovered" a formerly covered car. Id. Rather, it is a case in which "the policy as written could not have covered the liability in question under any circumstances." Zappone, 55 N.Y.2d at 134. In short, there was no coverage "by reason of lack of inclusion," and thus no notice of disclaimer was required. Id. at 137 (internal quotation marks omitted).

The court’s decision highlights the importance of distinguishing between policy provisions negating coverage, such as exclusions and policy conditions, which are subject to § 3420(d)’s timely disclaimer requirements, and provisions defining or otherwise clarifying the scope of coverage, which are not subject to § 3420(d).

You can read the opinion by clicking here.

UPDATE: New Estimates Double -- BP Oil Spill is the Equivalent to the Exxon Valdez Disaster Gushing Into the Gulf of Mexico Every 8 to 10 Days

Wed, 16 Jun 2010 10:35:04 GMT

The Flow Rate Technical Group, a federal panel, now estimate that 20,000 to 40,000 barrels of oil a day are flowing into the Gulf of Mexico as a result of the Deepwater Horizon explosion. This new range is far above the previous estimate of 12,000 to 19,000 barrels per day.

A barrel of oil is 42 gallons, so the median 30,000 barrels would equate to nearly 1.3 million gallons a day. By comparison, the entire Exxon Valdez disaster is estimated to have spilled 10.8 million gallons of oil into Prince William Sound in Alaska in 1989.

The higher estimates will affect not only appraisals of how much environmental damage the spill has done but also how much BP – along with numerous insurers -- might ultimately compensate parties to clean up the spill as well as the thousands of related claims and damages.

In response to the new estimate, Credit Suisse now approximates the cleanup costs could end up at $15 billion to $23 billion, plus an additional $14 billion for related claims. That said, many analysts point out that BP still retains some fiscal flexibility: it had net profits of $17 billion in 2009.

Andrew Gowers, a BP spokesman said the company did not have an estimate of what its impending liability costs would be, only that BP had already spent $1.43 billion, including claims payments, the costs of trying to plug and cap the leak, and payments of block grants to gulf states.

Dr. Ira Leifer, a researcher at the University of California, Santa Barbara, and a member of the Flow Rate Technical Group, said the new figures confirmed a suspicion he had developed, based on looking at satellite data, that the rate of flow for the well was increasing even before BP recently cut the riser pipe.

“The situation is growing worse,” Dr. Leifer said.

Stay tuned for regular updates.

“Green” Database to Track and Report on Retrofitted Buildings in New York City

Wed, 16 Jun 2010 10:31:03 GMT

The Deutsche Bank Americas Foundation is financing a database of hundreds of buildings that have been sustainably retrofitted in New York City. The database will track lighting changes, detail HVAC improvements, insulation upgrades, window replacements, potable water reduction and other substantial green adaptations, along with their respective cost and efficiency savings for building owners and occupants.

One of the key concerns of green building proponents throughout the country is how the cost and performance of green design –- favorably or unfavorably -- compares to conventional construction. Through the project, the Deutsche Bank Americas Foundation expects that the cataloging will be a useful reference for those considering an update to their own offices and buildings. If a point of reference, including empirical data, can be developed for cost and energy savings from retrofits, the hope is that it will lead to more companies and municipalities to undertake green renovations, according to Gary Hattem, president of the Deutsche Bank Americas Foundation.

Update: Moody’s Estimates that BP Spill Could Cost Insurers $3.5 Billion

Wed, 16 Jun 2010 10:26:11 GMT

This updates our June 1, 2010 posting.

The still-growing Deepwater Horizon oil spill in the Gulf of Mexico could combine with a hurricane to cause devastation along the Gulf Coast and trigger trouble for insurers, Moody's warned.

With millions of gallons of oil per day spewing into the Gulf of Mexico since April 22, 2010 – and several attempts to stop the flow having failed -- the Deepwater Horizon disaster cost increases by the day with Moody’s estimating the current total insured loss between $1.4 billion and $3.5 billion.

Moody's also reports that had BP purchased liability insurance in the commercial market instead of self-insuring its risks for property and liability cover through its captive insurer, Jupiter Insurance Ltd., the insurance and reinsurance industry's exposure to the loss would have been even higher than current $1.4 billion to $3.5 billion estimates.

Stay tuned for regular updates.

Recent Second Circuit Decision Denies Insurance Claims Against Italian Insurer on Holocaust-era Policies ― Upcoming Supreme Court Nominee’s Senate Judiciary Committee Hearing to Focus on the Decision

Wed, 16 Jun 2010 10:19:53 GMT

In a recent decision, In re Assicurazioni Generali, 592 F.3d 113 (2d Cir. 2010) (“Generali”), the United States Court of Appeals for the Second Circuit affirmed the dismissal of plaintiffs’ claims on the ground that they were preempted by an Executive Branch foreign policy favoring the resolution of such claims solely through the International Commission on Holocaust Era Insurance Claims (“ICHEIC”). For a complete copy of the Generali decision please click here.

In Generali, the plaintiffs -- victims of the Holocaust and their heirs -- sought to recover on unpaid World War II-era insurance policies issued by Generali, an Italian insurer, founded by Jewish merchants in 1831. In its decision, the Second Circuit relied heavily on the Supreme Court’s holding in American Insurance Association v. Garamendi, which dismissed plaintiff’s state law claims for failure to pay benefits on the ground that they were preempted by the “foreign policy” of the United States and that Holocaust-era insurance claims should be resolved instead through the ICHEIC. 539 U.S. 396 (2003) (California’s Holocaust Victim Insurance Relief Act interferes with the President’s conduct of the Nation’s foreign policy and is therefore preempted). For a complete copy of the Garamendi decision please click here.

* * * * *

On May 26, 2010, U.S. Senator Arlen Specter (D-Pa.), member of the Senate Judiciary Committee, made public a letter to Supreme Court nominee Elena Kagan in which he outlined the line of questioning he intends to pursue during her June 28, 2010 confirmation hearings. Senator Specter in his letter writes:

Just a few months ago, the United States Court of Appeals for the Second Circuit affirmed the dismissal of the plaintiffs’ claims on the ground that they were preempted by an Executive-branch foreign policy favoring the resolution of such claims through an international commission … The Court [in Generali] relied on cases addressing the preemptive effect of executive agreements purporting to settle claims of private litigants in federal courts.

I intend to ask you, among other questions:

(1) whether you understand the Supreme Court’s case law to require a finding of Congressional acquiescence as a condition of giving preemptive effect to an executive agreement;

(2) whether you agree with Justice Ginsburg’s dissenting opinion in Garamendi (joined by Justices Stevens, Scalia and Thomas) that an Executive-branch foreign policy not formalized in a treaty or an executive agreement cannot preempt state law; and

(3) what considerations you would bring to bear in deciding whether to vote to grant certiorari in this case, if confirmed. (My office has been advised that a petition for certiorari will be filed soon in this matter).

For a complete copy of Senator Specter’s letter please click here.

Aviation Insurance Association Annual Conference - Further Update

Tue, 15 Jun 2010 13:25:26 GMT

EAPD's Mark Meyer and Brian Green are in Vancouver at the Aviation Insurance Association Annual Conference, which continues to be interesting and informative.

One of yesterday's Keynote Speakers was Randy Finsneth, Vice President of Marketing at Boeing Commercial Airplaines. He discussed the Boeing 787 Dreamliner, which is Boeing's newest addition to its commercial fleet, the first of which should be used for commercial flight later this year. The 787 promises to be more than 20% more fuel-efficent than other planes, as well as significantly quieter. It also will have larger cabin windows, which can be electronically dimmed to reduce glare but allow passengers to see outside. The internal pressure of the plane will be the equivalent of 6,000 feet altitude rather than the 8,000 feet on other aircraft, which, according to Mr. Finsneth, will significantly improve passenger comfort. You can read more about the 787 on Mr. Finsneth's blog, Randy's Journal, by clicking here.

Another interesting panel yesterday discussed the risk and safety of helicopter flights.

Later today, the general session hosted by the Attorney and Claims Divisions will take place. One of the items they will discuss is the AIA's Alternative Dispute Resolution Service.

The conference ends later this morning. Next year's Annual Conference will take place in Miami in early May.

You can contact Mark and Brian at mmeyer@eapdlaw.com and bgreen@eapdlaw.com, respectively.

Aviation Insurance Association Annual Conference - Update

Tue, 15 Jun 2010 13:22:59 GMT

EAPD's Mark Meyer and Brian Green are attending the Aviation Insurance Association's Annual Conference in Vancouver, Canada. The conference is well-attended and informative. There were several interesting CIE sessions on Sunday, including a discussion of the criminalization of aviation accidents. Our speaker explained that the trend is that in Europe and Latin America, investigations into accidents also often included criminal investigations, and sometimes indictments, of the pilots, flight controllers and others who were claimed to be involved in the accident. Unfortunately, these criminal investigations can hinder the causation investigation that is performed after the accident.

One of the other CIE sessions, co-presented by Mark Meyer, involved a discussion of the London market. The presenters gave an overview of the London market, including both Lloyd's and the Company Market. They discussed underwriting issues as well as claims-related issues such as volcanic ash.

The conference contiues through Tuesday and you can contact Mark and Brian at mmeyer@eapdlaw.com and bgreen@eapdlaw.com, respectively.

Led by Costa Rica, Central American Insurance Premiums Up 8.1%

Tue, 15 Jun 2010 11:54:13 GMT

As a region, Central American (including Panama) insurance premiums rose 8.1% when comparing Q1 2010 to Q1 2009, totaling US$ 529 million during the first quarter of 2010. Premiums for Costa Rica’s Instituto Nacional de Seguros, effectively still a monopoly holder in the market for the time being despite recent regulatory changes, rose 16.6% for the period. Positive premium growth was not uniform across jurisdictions, as both Nicaragua (-1.3%) and El Salvador (-1.0%) experienced lower premiums for the period.

Except for El Salvador, however, all of the Central American countries experienced bottom-line earnings increases, with the region totaling an increase of 49% for the period. Regional average loss ratios for the period decreased from 53.5% to 48.3%.

If you would be interested in learning more about the Central American and/or other Latin American (re)insurance markets and/or regulatory environments, please click the “Email the Editor” button and provide your contact information for follow-up by an EAPD attorney.

Third Circuit Holds That Drunken Shooting Attempt Is Not An “Accident” For Purposes Of Insurance Coverage

Tue, 15 Jun 2010 11:50:35 GMT

The Third Circuit recently held that an insured who, while intoxicated, allegedly attempted to shoot another person was not covered under his homeowner’s insurance policies for the resulting liability, as the attempted shooting could not constitute an “accident.” State Farm Fire & Cas. Co. v. Mehlman, Nos. 08-220, 08-2261, 08-2262 (Dec. 16, 2009).

After several drinks, and with a blood alcohol level of 0.21 percent, the insured allegedly chased a woman and repeatedly attempted to shoot her, but the gun malfunctioned on each attempt. The insured later took his own life. The alleged target of the attempted shootings then sued the insured’s estate for intentional and negligent infliction of emotional distress, assault with a firearm, and negligence. State Farm, which had issued a homeowner’s policy and umbrella policy to the alleged gunman, sued both plaintiff and defendants for a declaratory judgment that there was no coverage. The policies provided coverage for an “occurrence” and a “loss,” respectively, both of which were defined as an “accident.”

The issue on appeal to the Third Circuit was whether the insured’s intoxication rendered the alleged shooting attempts “accidental.” The District Court had held that issues of fact remained with regard to coverage under the umbrella policy. The Third Circuit disagreed and granted summary judgment to the insurer as to both policies. The court observed that “alcoholic beverages certainly can contribute to the loosening of a person’s inhibitions without eliminating his ability to intend to engage in harmful conduct.” Accordingly, the court held where “the injured party does not make allegations indicating that an insured’s intoxication prevented him from intending the consequences of his violent behavior,” Pennsylvania law “does not permit an insured … to shift responsibility for the damages resulting from his behavior to his insurer.” In other words, “Pennsylvania courts will not lightly allow an insured to avoid the financial repercussions of an act of violence by drinking himself into insurance coverage.”

The court also rejected the insured’s contention that the claims for “negligence” triggered a duty to defend. The court cited Pennsylvania law that “the particular cause of action that a complainant pleads is not determinative” of whether coverage exists; rather, courts must “look at the factual allegations.” The court therefore held that the insured in this cause “cannot square the circle” by arguing that he “breached the duty of care he owed” the victim “when he attempted to shoot and kill her.” He did breach a duty, observed the court, “but the duty he breached was not a duty of reasonable care, it was a duty not to harm her intentionally.”

A copy of the decision is available here.

Connecticut Supreme Court Affirms Summary Judgment for Insurer on Because Prior Administrative Proceeding for Unemployment Benefits Constituted a Related Claim

Tue, 15 Jun 2010 11:30:03 GMT

The Connecticut Supreme Court recently affirmed summary judgment in favor of an insurance company on the basis that a wrongful termination lawsuit against an insured was related to a prior administrative action for unemployment benefits and was therefore excluded by the policy. National Waste Associates, LLC v. Travelers Casualty and Surety Co. of America, SC 18380 (Conn. Jan. 19, 2010).

An action alleging wrongful discharge was filed against the plaintiff by its former employee. The plaintiff made a claim against the defendant insurer under a claims-made employment practices liability insurance policy. The insurer declined to provide a defense or indemnity in connection with that action, and the plaintiff commenced a lawsuit against its insurer.

The insurer moved for summary judgment on the basis that it had no duty to defend or indemnify the plaintiff based on exclusion 5 of the policy. Exclusion 5 of the policy provides: “This [l]iability [c]overage shall not apply to, and the [defendant] shall have no duty to defend or to pay, advance or reimburse [d]efense [e]xpenses for, any [c]laim . . . based upon, alleging, arising out of, or in any way relating to, directly or indirectly, any fact, circumstance, situation, transaction, event or [w]rongful [a]ct underlying or alleged in any prior or pending civil, criminal, administrative or regulatory proceeding, including audits initiated by the Office of Federal Contract Compliance Programs, against any [i]nsured as of or prior to the applicable [p]rior and [p]ending [p]roceeding [d]ate set forth in [the policy declarations] ….” (Emphasis in original.) The insurer argued that exclusion 5 applied to bar coverage because the plaintiff had been a party to an administrative action in front of the State of Connecticut, Department of Labor, Employment Security Appeals Division, which action involved a claim for unemployment benefits by the same former employee, which action included allegations that the former employee had been wrongfully discharged by the plaintiff, and which action had not been disclosed on the plaintiff’s insurance policy application.

The trial court agreed with the insurer that the unemployment benefit proceedings “clearly constituted ‘administrative proceedings’ within the meaning of the policy” and granted the insurer’s motion for summary judgment based on exclusion 5. In reaching its conclusion, the trial court “generally considered the purpose and function of ‘claims-made’ insurance policies such as the one at issue here, and it relied on jurisprudence involving similar policy terms and analogous agency proceedings, and Connecticut courts’ repeated characterization of unemployment proceedings as ‘administrative.’”

The Supreme Court affirmed the judgment of the trial court for the reasons addressed by the trial court.

A copy of the Supreme Court opinion is available here, and a copy of the trial court opinion is available here.

Lloyd’s Reports “Green Energy no Longer Just Nice but Necessary”

Tue, 15 Jun 2010 10:59:24 GMT

A recent joint report by Lloyd’s 360º Risk Insight and UK think tank Chatham House entitled Sustainable Energy Security: Strategic Risks and Opportunities for Business, finds that worldwide we face an era of ambiguity and volatility in our energy supply. Mounting prices and supply interruptions will become more recurrent due to growing consumption, insufficient investment, and threats to IT systems and transportation. For a complete copy of the Report please click here.

Dependence on coal, natural gas, and petroleum is propelling the exploration for reserves into more complex and precarious terrains as waning production from “easy” oil reserves combines with rising demand from developing economies; the most recent example being the current Deepwater Horizon oil spill in the Gulf of Mexico. However, this type of disaster could spark the transition to more efficient, clean and renewable energy systems. “Green” energy systems are no longer just nice to have, but are essential in securing our energy supply and protecting and promoting a sustainable environment, according to the new Report. In the face of mounting political and social pressure to decrease greenhouse gases and protect our environment, businesses will likely be persuaded to become more efficient consumers of energy and adopt green technologies.

The Report states that the expected level of investment in renewables and green energy – up to $500 billion per year by 2050 – provides remarkable prospects for business, but the lack of international consensus on carbon reduction is inhibiting commitment and investments. Ultimately, the reliance on a voluntary commitment to deal with energy shortages points to a more expensive undertaking globally as greener practices require retooling existing business strategies, and in the absence of set standards is sure to result in an arbitrary process. To this end, the Report calls on governments to set clear policies and create certainty in the transformation to a low carbon economy.

The Report also cautions that businesses need to plan for a fresh set of risks as our energy system changes. Various renewable technology systems use uncommon materials and the mounting dependence on electrical energy and IT may well increase susceptibility to cyber attacks. Accordingly, the global business community is advised to re-evaluate international supply chains and boost the protections of their operations as we move into this new era.

State Lawmakers Lobby for a Seat at the Financial Stability Oversight Council

Mon, 14 Jun 2010 14:51:21 GMT

As negotiations over a final financial reform overhall draw closer to a conclusion, leadership at the National Conference of Insurance Legislators (“NCOIL”) petitioned Senate leadership for membership in the Financial Stability Oversight Council (“FSOC”). As currently drafted in the Senate's reform bill, S. 3217, the FSOC is designed to coordinate efforts to identify systemic risks to the financial stability of the United States.

Membership on the final oversight council is still undecided. Both the House and Senate financial reform bills, which need to be reconciled before they are signed into law by the President, provide for different membership constituencies. While there is overlap between the two regarding the seats mandated for federal regulators, the seats on the FSOC for those representing the interests of the states has yet to be decided.

NCOIL believes that not only should state officials gain membership to the FSOC, but that such members should include state lawmakers, as it is the “legislators’ responsibility to write insurance, banking, and securities statutes.” In the words of NCOIL President Rep. Robert Damron (KY), “any plan designed to monitor and control systemic risk should include a central role for state officials and should call for enhanced communication and collaboration among all regulators, both state and federal.”

Bermuda Continues Stride Towards Regulatory Equivalency with Solvency II

Mon, 14 Jun 2010 14:46:19 GMT

The Bermuda Monetary Authority (“BMA”) announced on June 1 that it had taken an important step towards achieving equivalence with the European Union’s imminent Solvency II regulations by initiating a pilot of its internal capital model (“ICM”) review process with Bermuda’s largest commercial insurers. Under the ICM framework, insurers and reinsurers, with the approval of the BMA, will be able to use their own ICM to determine the amount of regulatory capital required for such companies.

The proposal is part of the broader initiative of the BMA to prepare Bermuda’s insurance and reinsurance regulations for third-country equivalence assessments under Europe’s Solvency II Directive. It is important, particularly for Bermuda-based insurers and reinsurers conducting business in Europe, that regulatory equivalence is achieved in order to avoid becoming competitively disadvantaged.

Director of Policy, Research and Risk Assessment at the BMA, Craig Swan said, "The pilot enables the Authority to test its review process, allowing for refinements to be made to the framework as required, and will assist in our resource planning to support the process moving forward…The ICM assessment includes evaluating the adequacy of the design, statistical quality and calibration of the models submitted, and, importantly, the governance structure, controls and documentation surrounding them."

BMA chief executive officer Jeremy Cox noted, "Once the framework is implemented the Authority will provide approval for a model for regulatory purposes only if it is assured that all relevant minimum standards are met, and that an insurer has established an effective and suitable track record of reliable risk management.”

In July 2009 the BMA issued guidance notes outlining the components of the ICM framework thereby formally establishing a standards and applications process for allowing the use of insurers’ and reinsurers' ICM. These components include detailed pre-application conditions that must be met prior to submitting their models for review; the application review procedures the BMA will follow; and the monitoring and control activities the BMA will undertake once a model has been approved.

U.S. Lawsuits Based Upon Foreign Toxic Tort Liability: A Growing Threat?

Mon, 14 Jun 2010 14:39:37 GMT

In July 2009 in New Castle County in the State of Delaware, three separate plaintiffs filed civil suits against E. I. Du Pont De Nemours and Company, Inc. (“DuPont”) alleging that their work at a DuPont textile plant in Mercedes, Argentina from 1961 to 2002 caused them to be exposed to and inhale asbestos fibers. Specifically, these former DuPont employees (collectively “Plaintiffs”) allege they developed asbestos-related diseases as a result of DuPont’s negligence in creating and maintaining a dangerous work environment at DuPont’s Mercedes, Argentina facility. That these suits have not been summarily dismissed should be cause for some concern among companies with exposure to similar issues arising from their activities in Latin America, Asia and Africa.

Asbestos litigation in the United States, like asbestos itself throughout the middle of the last century, is ever-present; however, the majority of asbestos claims in the United States are filed by plaintiffs that actually live in the United States. Plaintiffs reside in Argentina and concede in their complaints that the textile mill in Argentina is actually owned and operated by DuPont Argentina S.A. (“DuPont Argentina”), a duly organized corporation under the laws of Argentina. Nonetheless, Plaintiffs assert that DuPont is the parent company of DuPont Argentina and that the former directed and controlled the manufacture and use of asbestos by DuPont Argentina.

For over three decades, corporations and their insurances carriers have defended claims in the asbestos arena throughout the United States. Initially, plaintiffs with asbestos-related diseases – mesothelioma, asbestosis, lung cancer and pleural plaques – targeted corporations that mined and distributed raw asbestos fibers or manufactured products in the insulation trade. Indeed, literature and studies in the 1950s and 1960s focused primarily on the hazards of working with asbestos insulation products.

In the 1970s and early 1980s, studies and government regulations warned about asbestos-containing products such as cement pipe, joint compound, brakes, gaskets and roofing products and, consequently, asbestos litigation evolved so as to include this group of manufacturers in newly filed lawsuits. Today, insurance companies and their insureds still expend millions of dollars defending asbestos claims all over the United States; however, given government regulations concerning permissible exposure limits that were enacted as early as 1972, it is expected that fewer individuals will develop asbestos-related conditions in the future. Notably, many experts expect that the number of asbestos claims in the United States will steadily decrease beginning in 2025.

With a foreseeable end of asbestos litigation in sight, the filing of new asbestos lawsuits in the United States that concern parties, premises and events from foreign countries is alarming. The costs inherent in defending asbestos claims in the United States can be exorbitant as attorneys and experts are retained to conduct discovery, disprove plaintiffs’ allegations, provide medical, industrial and “state of the art” defenses, and ultimately settle or try asbestos cases. These costs could double if not triple if asbestos lawsuits concerning a plaintiff’s exposure to an asbestos-containing product in a foreign country were permitted to be litigated in the United States simply because a defendant corporation has ties to the United States.

In response to Plaintiffs’ complaint, DuPont filed a motion to dismiss on the grounds that Plaintiffs improperly sued DuPont instead of DuPont Argentina and that the doctrine of forum non conveniens requires that these cases proceed in Argentina where the facility, all of the witnesses and documents are located. In support of its argument, DuPont referenced a May 1, 2009 ruling issued by the Seventh Circuit Court of Appeals affirming the dismissal of two cases based on the doctrine of forum non conveniens brought by Argentines against United States corporations. In the two cases before the Seventh Circuit, the plaintiffs referenced the Treaty of Friendship, Commerce and Navigation Between Argentina and the United States – signed into law by President Franklin Pierce on July 27, 1853 – for the proposition that they were entitled to sue the defendants in the United States. Judge Posner, writing for the Court, did not disagree but rather concluded that the lower courts reached the correct opinion that these cases should be litigated in Argentina because that was where the plaintiffs resided and were injured, but expressly left the door open to foreign plaintiffs to bring lawsuits in the U.S.

The prospect of a new wave of asbestos claimants from foreign countries being permitted to bring suit in the United States has significant ramifications for defendant corporations already involved in asbestos litigation, their insurance and reinsurance carriers, and many Courts in the United States. Significantly, as Plaintiffs’ counsel warned in its June 24, 2009 press release, more suits based on foreign subsidiaries’ use of asbestos in countries in Latin America, Africa and Asia are “soon to follow.” True to his word, Plaintiff’s counsel filed 19 additional cases on behalf of an additional 19 former employees of DuPont’s foreign subsidiary, Dupont Argentina S.A. (“DASA”) and also filed four cases alleging household exposure and environmental claims related to DASA’s manufacturing operations in Argentina. Should the Court in New Castle County deem Delaware a proper forum for Plaintiffs to file their asbestos lawsuits, aggressive plaintiffs’ counsel and their injured claimants will certainly turn to United States courts for adjudication of their claims for years to come.

Eruptions and Disruption But No Indemnification

Fri, 11 Jun 2010 15:33:07 GMT

This article explains the liability faced by air carriers arising out of the closure of most of Europe’s airspace for six days in April 2010, the lack of insurance to cover that loss and the new products being considered to cover such eventualities in future.

Europe is now reflecting on the lessons to be learned from the closure of most of its airspace for almost a week as a result of the eruption of Iceland’s Eyjafjallajökull volcano that had been dormant for over 200 years. Whilst many will focus on the role of governments and regulators in closing the airspace, much has also been said and written about the losses suffered by airlines and the lack of available insurance to cover that loss, as well as the losses of hundreds of thousands stranded travellers. The International Air Transport Association’s (IATA) estimate of the cost to the worldwide airline industry is US$1.7billion.

Insurance for Stranded Travellers

The usual reaction of a traveller faced with the effects of a natural disaster is to look to their travel insurer to provide indemnity for their losses. However, it is rare that the terms of the insurance are read before the cover is called upon and this results in a mismatch between the expectations of the insured and the cover they have purchased. While the media often paints insurers as the villain, this does not reflect the fact that the insurance was priced to cover the specified perils. There are three matters of which potential claimants should be aware:

- Coverage is triggered under most policies following a delay caused by (a) strike, civil commotion, riot, or (b) mechanical failure or breakdown of the relevant public transport, or (c) weather.
Under ordinary rules of interpretation, it is unlikely that volcanic ash in the atmosphere would be treated as a weather phenomenon. It may nevertheless be argued that weather is synonymous with atmospheric or meteorological conditions, which should include changes caused by volcanic ash.

- Cover is often excluded where the withdrawal of public transport is by order or recommendation of a regulatory authority or government. Policies with such a provision would bar coverage in this instance. This exclusion is often present in delay and cancellation or curtailment insurance (where a trip is cancelled or curtailed prior to departure).

- The available limits of cover will almost always be insufficient to cover the actual loss incurred and will usually provide a fixed benefit up to a few hundred pounds. Accordingly, even if the claim is covered, the insurance is likely to provide a partial indemnity only.

The Liability of Air Carriers

The European Union (EU) brought in legislation across Member States in February 2005 providing care and compensation for passengers affected by flight cancellations, delay or denied boarding (EC Regulation 261/2004). The Regulation applies to community carriers, ie carriers licenced in any Member State, and to non-community carriers for cancelled flights from the country of a Member State. There are two elements to the compensation for a cancelled flight: the necessity to provide hotel accommodation, meals, travel to the airport and reimbursements of certain phone or internet costs (referred to as care) and monetary compensation of up to 600 Euros per passenger depending on the length of the flight. The second element of the compensation is subject to an “exceptional circumstances” defence, which almost certainly applied in this instance. The first element applied to all cancelled flights and airlines cannot contract out of it. It is a mandatory provision. Airlines are also obliged to provide written notice of the compensation available to passengers. The results of this provision can be arbitrary. For example, a British Airways passenger stranded in San Francisco receives the benefit of this Regulation. Had the passenger flown on a US carrier, the Regulation would not apply. However, a passenger that had flown on a US carrier to London and then had the return flight cancelled would fall within the Regulation, as the affected flight was to depart from an airport within the EU. Airlines face criminal sanctions if they fail to comply with the Regulation. It is usually the Civil Aviation Authority in the relevant EU country that is tasked with enforcement.

Airline Insurance

Generally, airline liability policies require some form of legal liability to passengers for bodily injury or death and/or property damage. That was absent in this instance and it is very unlikely that the standard airline liability coverages would be triggered.

Many airlines purchase Business Interruption (BI) insurance, but such policies almost always also require some form of property damage to be triggered. Coverage for airline BI was in the spotlight following the attacks of September 11 2001, and the contrasting experiences of United Airlines and US Airways are informative. The US Federal Aviation Administration ordered the closure of Washington’s Reagan National Airport in the immediate aftermath of the World Trade Center attacks, fearing that the US Capitol may be attacked. The airport was closed prior to the attack at the Pentagon. As a result of the closure, both airlines claimed for lost income under their BI policies. United failed to recover under its policy but US Airways did recover. The contrasting outcomes were the result of nuances in their respective wordings. United’s policy was triggered if access to the insured’s property was prohibited by order of a civil authority as a direct result of “damage to adjacent premises”. The US Airways’ policy provided coverage if access to the insured’s property was prohibited by order of a civil authority “as a direct result of a peril insured against”. Understandably, the Federal Appeals Court in the United case did not consider the Pentagon (a building 3 miles away) to be adjacent to United’s property. Conversely, a Virginia State Court concluded that US Airways’ policy did not require actual damage or loss of the insured’s property to invoke coverage but only the risk of actual damage. The closure of the airport was due to the risk of an imminent attack at the airport which housed US Airways’ property.

The Market Response

It is unprecedented for airlines to incur a US$1.7billion loss from a single occurrence and find that there is no insurance to compensate the loss. This has produced a rush to develop a policy that might respond to a similar natural catastrophe in the future at a price that is affordable and provides reasonable coverage.

In this section, we consider the key provisions that might be included in such coverage and how the policy could be structured to make it more affordable.

Scope of Cover

Brokers have offered BI insurance to aviation companies for many years and will be cognisant of the key provisions of such cover. It is nevertheless to be expected that such policies will need to be tailored to the risk posed by volcanic eruptions and other events that prevent an airline flying its planes. The key provisions for such policies are as follows:

- Coverage triggers should not be linked to physical damage but to an event or occurrence resulting in a necessary ban or suspension of flights. The way this is expressed is not necessarily encompassed by force majeure, which may be interpreted as covering events like severe weather or industrial action. Many insurers will not want to cover such perils but instead limit coverage to natural events. Also, the wording should address whether cover is triggered as a result of a prohibition against using airspace or perhaps a lesser standard of the airspace being impaired by closure or the withdrawal of air control services in a region that ordinarily provides such service. This would cover the situation that occurred over Europe, where there was no legal bar to flying but no air traffic control was provided, effectively grounding all commercial flights. One might also consider whether cover should be triggered by the inability to operate from a serviced airfield due to regulatory restrictions, eg avian flu.

- A waiting period after which coverage is triggered, eg 48 hours. This would reflect ISO wording for BI policies.

- A limitation on the period of closure for which cover is available.

- Extra expense coverage – the cost of “caring for” passengers and/or compensating them pursuant to a legal obligation on an air carrier and the cost of operating extra flights to return stranded passengers to their destinations.

- Denied ingress/egress cover.

- An agreed methodology for calculating how the loss is valued, eg a combination of the airline’s revenue per passenger mile and revenue per available seat mile.

- Confidential arbitration to resolve disputes within a specified timeframe.

The Use of a Captive or Mutual Insurer

One of the limitations on buying BI insurance as outlined above is the perceived expense of such cover and many in the market believe that the cost of a policy for force majeure-type situations would be prohibitive. An effective method of reducing premium costs is the use of a captive insurer and this model has been employed successfully in other lines of insurance business. However, it is not without difficulties. The advantages of a captive insurance structure are clear. It retains the profit that might be made in a traditional insurance arrangement within the group of companies setting it up and any underwriting surplus can be retained to increase capacity in the future. Also, it allows investment income to be earned on the premiums paid, the capital payments setting up the captive are tax deductible and if suitably located, the captive will benefit from favourable tax and regulatory regimes. For example, IATA member carriers (and perhaps the Airports Council International) could set up an off-shore captive insurer to cover force majeure and/or natural catastrophes. The captive would offer specified limits of cover which may need to scale depending on claim volumes. The captive is likely to require extensive reinsurance in the early years and that reinsurance may well have a high attachment point. The terms of cover provided by the captive are likely to be broader than those provided under traditional BI policies. Above the captive’s policy limits, carriers or airports could buy high level excess cover.

Other benefits of using a captive include:

- a reduced risk of “moral hazard”, as there is an obvious incentive on covered parties to minimise their loss.

- it is more likely that the wording used will be sufficiently broad to cover the perils for which cover is sought, but it will need to be acceptable to reinsurers.

- there is less likelihood of disputes over what it is intended to be covered.

As with all types of insurance or reinsurance, there are pitfalls. The captive is a company in its own right and its directors will owe fiduciary duties to it. Accordingly, premiums will need to be commercially priced. There will be substantial start up costs together with the cost of capitalising the captive and installing a professional management team. The financing would need to come from the policyholders. The captive would also be heavily exposed to risk aggregation, whereas commercial insurers are spread over many companies and lines of business.

Reinsurance purchased by the captive would need to be “as original” or “back to back”. However, specific words of incorporation would be needed to ensure that jurisdiction and choice of law provisions are the same as between the captive’s policy and the reinsurance. The notice and claims co-operation provisions in the reinsurance will need to be adapted to reflect the captive structure. One might also consider including a “conflicts of interpretation” clause and a payment obligation under the reinsurance on the day the captive makes payment. Notwithstanding the pitfalls, captive insurance structures can provide greater flexibility than traditional insurance arrangements.

Insurance is nothing if not responsive to the commercial environment and the challenge posed by the eruption in Iceland has set the global insurance market the challenge of finding a solution. It is only a matter of time until it does so.

This article is sourced from the June 2010 Issue of the IRD Newsletter which can be found here.

World Cup Insurance Estimated at Over 6 Billion Pounds

Fri, 11 Jun 2010 15:28:18 GMT

According to an estimate provided by Lloyd’s of London, over £6.2 billion worth of insurance coverage has been purchased by individuals and entities in connection with the 2010 FIFA World Cup, which begins today. Over half of that amount is for coverage for stadiums and training facilities, which reflects the vast amount of money that has been spent constructing and upgrading stadiums ($5.5 billion, according to the New York Times). Additional coverage is for losses that could result from match delays, such as advertising money and ticket refunds. The estimate does not include policies covering illness or injury of individual players, which can run as high as £40 million.

One World Cup-related policy sold by Berkshire Hathaway Inc. has been receiving a significant amount of press coverage. Warren Buffett recently revealed that one of his insurance companies has agreed to pay approximately $30 million to an unnamed insured if France wins the World Cup.

UK: Financial Services Authority (FSA) Publishes Consultation Paper on Competence and Ethics

Fri, 11 Jun 2010 10:38:01 GMT

The FSA has recently published a consultation paper entitled "Competence and ethics" (CP10/12).

The consultation paper sets out the FSA's proposals to strengthen and clarify its competence and ethics requirements for the financial services sector. Within the consultation paper, the FSA has published a report by the Cattellyst Consultancy, which sets out the findings of a review of how firms implemented the competence regime introduced by the FSA in 2007. These findings assisted the FSA in producing the consultation paper.

The proposals in the consultation paper are aimed at both firms and individuals performing certain roles within firms. The proposals include introducing a 30 month time limit, within which relevant individuals must successfully pass all modules of a qualification required for their role, and clarifying how individuals carrying out approved persons roles should demonstrate good standards of ethical behaviour.

The consultation paper can be viewed here. Comments can be made until 6 September 2010.

Europe: Committee of European Securities Regulators Publishes Model Short Selling Disclosure Regime

Fri, 11 Jun 2010 10:34:27 GMT

We have reported previously on the UK Financial Services Authority (FSA)'s short selling disclosure rules, most recently as consultation on its implementation of the UK's Financial Services Act 2010 (click here to read our post). In that consultation, the FSA noted that the Committee of European Securities Regulators (CESR) was consulting on a Pan-European regime.

On 26 May 2010, CESR published its report. The report recommends private disclosure to the relevant regulator when thresholds of 0.2%, 0.3% and 0.4% of issued share capital are crossed, and public disclosure when 0.5% and each 0.1% thereafter are crossed. The report recommends that the permanent disclosure regime should not be limited by sector (in the UK, it is limited to the financial sector only).

The report also provides technical details including how to calculate net short positions and changes in those positions, netting and aggregation of net short positions where more than one investment decision maker takes net short positions within a single legal entity and exemptions from disclosure obligations for market makers.

CESR has recommended that the pan-European short selling disclosure regime is introduced as soon as possible. In the meantime, CESR has said that those of its members that already have the requisite powers to introduce the regime will start the process of doing so, while those members that do not have the necessary powers will seek to implement the regime on a best efforts basis, pending adoption of a European regime.

A copy of the report can be found by clicking here.

UK Client Money Deadline Approaches

Fri, 11 Jun 2010 10:29:00 GMT

We have previously reported on the UK Financial Services Authority's (FSA) Client Money and Asset Report (the Report), published in January 2010 (click here to see our previous blog post).

On 19 January 2010, the FSA sent a Dear CEO letter to firms regarding their consideration of the Report and compliance with their client money and assets obligations.

On 20 May 2010, the FSA sent another Dear CEO letter, setting a final deadline of 30 June 2010 for all firms to report back:

that they have properly considered the content of the letter and the Report;
whether or not the firm is in compliance with its client money and assets obligations; and
the name and contact details of the person who has overall responsibility for compliance with the FSA’s client money and assets requirements.

The Dear CEO letter dated 20 May 2010 can be viewed by clicking here.

EAPD Attends Aviation Insurance Association’s Annual Conference

Thu, 10 Jun 2010 22:06:00 GMT

Mark Meyer (London) and Brian Green (New York) of EAPD will attend the Aviation Insurance Association’s Annual Conference in Vancouver, Canada, which begins on Saturday, June 12.

The Keynote Speakers at the conference will be Randy J. Tinseth, Vice President – Marketing of Boeing Commercial Airplanes and James K. Coyne, President of the National Air Transportation Association. Mark and Chris Jones of Global Aerospace will present on "The Differences Between U.S. and European Claims Handling and Underwriting."

Mark and Brian plan to blog from the conference so watch this space in the coming days for updates. You can email Mark (mmeyer@eapdlaw.com) or Brian (bgreen@eapdlaw.com) if you have any questions or want to schedule a time to meet them while they are in Vancouver.

PIANY receives approval on draft language regarding producer compensation disclosure

Thu, 10 Jun 2010 20:42:18 GMT

As previously discussed here, the New York Insurance Department (the “Department”) has put forth a regulation regarding the transparency of insurance producer compensation (“Regulation 194”), which is slated to take effect January 1, 2011.

Under Section 30.3(a) of Regulation 194:

[With limited exceptions], an insurance producer selling an insurance contract shall disclose the following information to the purchaser orally or in a prominent writing at or prior to the time of application for the insurance contract:

a description of the role of the insurance producer in the sale;

whether the insurance producer will receive compensation from the selling insurer or other third party based in whole or in part on the insurance contract the producer sells;

that the compensation paid to the insurance producer may vary depending on a number of factors, including (if applicable) the insurance contract and the insurer that the purchaser selects, the volume of business the producer provides to the insurer or the profitability of the insurance contracts that the producer provides to the insurer; and

that the purchaser may obtain information about the compensation expected to be received by the producer based in whole or in part on the sale, and the compensation expected to be received based in whole or in part on any alternative quotes presented by the producer, by requesting such information from the producer.

Earlier this year, the Professional Insurance Agents of New York (“PIANY”) submitted draft language to satisfy the above requirements to the Department for its approval. Last week the Department approved the language in a letter to PIANY, stating that it “squarely addresses [the] four items [set for the in Section 30.3(a)].”

Should the purchaser request more information about the producer’s compensation, Regulation 194 sets out a series of additional disclosure requirements not addressed in PIANY draft language, as it only address the “primary disclosure” requirements.

According to PIANY President Kevin M. Ryan, “PIA [our national organization] continues to object to the regulation, but we are pleased that our ongoing discussions with the [Department] have already garnered clear guidance from the [D]epartment on critical compliance issues.”

Additionally, as discussed here, the Independent Insurance Agents & Brokers of New York (“IIABNY”) and the Council of Insurance Brokers of Greater New York are suing the Department in an Article 78 proceeding that alleges it does not have the legal authority to require insurance producers to disclose to their clients certain information about how insurance companies compensate them. The two organizations filed their joint Article 78 Petition on May 25, 2010 in New York State Supreme Court in Albany.

In following a dual-course of action, IIABNY has also submitted proposed language to the Department for approval as satisfying the primary disclosure requirements of Regulation 194 in early May. The Department has not yet commented on IIABNY’s proposed language.

FEMA Confirms NFIP Coverage Applies to Certain BP Oil Spill Damage

Thu, 10 Jun 2010 20:40:59 GMT

According to media reports, the Federal Emergency Management Agency (“FEMA”) has confirmed that damage caused by oil mixed with flood waters is covered under National Flood Insurance Program (“NFIP”) policies. FEMA noted that before claims for damages from the British Petroleum (BP) oil spill will be paid there must be a flood as defined in the NFIP policy. Subject to the terms of the policy, claims for residential properties would be covered up to the policy limits and claims for commercial properties would be covered up to $10,000. NFIP policies would not, however, cover damage to the land.

Mexico and Alberta Pass New Data Protection Laws

Thu, 10 Jun 2010 20:37:51 GMT

On April 27, 2010, the Mexican Senate passed a data protection law that addresses how private and public entities handle the collection, use and disclosure of personal information of Mexican residents. The new law expands the authority of the Mexico’s data protection authority, now called the Federal Institute of Access to Information and Data Protection. The Institute will conduct inspections and enforce compliance with the new law.

On May 1, 2010, Alberta became the first Canadian province to pass a general data breach notification law. Bill 54 added new sections to The Personal Information Protection Act, and requires that notice of a data breach be provided to affected individuals and Alberta’s Information and Privacy Commissioner. Notice to individuals is only required if there is a “real risk of significant harm.”

Click here to view the text of the data protection law in Mexico (in Spanish).

Click here to view the Alberta law.

Court Denies Wells Fargo’s Motion to Dismiss on Statute of Limitations Grounds

Thu, 10 Jun 2010 20:31:24 GMT

The United States District Court for the Northern District of California recently granted in part and denied in part motions to dismiss a class action brought by a class of purchasers of mortgage pass-through certificates. In Re Wells Fargo Mortgage-Backed Certificates Litigation, C 09-01376 SI. [Click here for a copy of the court’s decision.]

The complaint, filed on March 27, 2009, against Wells Fargo Bank, the originator and custodian/servicer on the underlying loans, various rating agencies who rated the credit quality of the pooled mortgages, and the entities that had sold the certificates to investors, alleged violations of §§11, 12, and 15 of the Securities Act of 1933. Specifically, the complaint alleged that the offering documents contained numerous false and misleading statements and omissions regarding Wells Fargo’s underwriting process, loan standards, the appraisal value of the underlying properties and the credit quality of the certificates.

Defendants moved to dismiss the consolidated class action on numerous grounds, including: (1) lack of standing against Wells Fargo and the underwriter defendants; (2) statute of limitations; (3) no liability on the part of the ratings agencies under the Securities Act; and (4) that plaintiffs had failed to allege any actionable misstatements.

The court agreed that plaintiffs did not have standing to bring suit on behalf of those who purchased securities through offerings in which the named plaintiffs had not purchased securities. Accordingly, of the 54 offerings described in the complaint, the court held that plaintiffs only had standing to bring suit with respect to the 17 offerings through which they purchased securities. The court also dismissed plaintiffs’ §12 claims because the plaintiffs failed to allege that they had purchased the securities in question directly from defendants (instead stating that plaintiffs had “purchased or otherwise acquired certificates pursuant and/or traceable to the defective prospectuses.”) As a result, the court dismissed those claims without prejudice.

The court also granted the motion to dismiss as to the ratings agencies, finding that the agencies were not subject to §11 liability. The court specifically rejected the plaintiffs’ claim that rating agencies could be held liable as underwriters.

The court, however, rejected defendants’ argument that the complaint should be dismissed on statute of limitations grounds. Defendants argued that the complaint should be dismissed because the plaintiffs’ claims accrued more than one year before the complaint was filed (March 27, 2009). According to the defendants, the plaintiffs were put on inquiry notice before March 27, 2008 by a series of articles involving the mortgage crisis and mortgage backed securities, as well as by the fact that ratings agencies began downgrading the certificates in December of 2007. The court held that whether the articles were sufficient to put investors on inquiry notice was a question of fact, not appropriate for evaluation in a motion to dismiss. Similarly, the court held that whether the minor downgrades prior to March 2008 (from AAA to AA to A), could have put the plaintiffs on inquiry notice was a question of fact.

Finally, the court held that plaintiffs had sufficiently stated a claim with respect to the alleged misstatements or omissions remaining in the complaint. Despite defendants’ arguments that the complaint did not tie the inconsistent underwriting conduct to the certificates at issue in this case, the court found that the plaintiffs alleged that the challenged conduct (i.e., placing intense pressure on loan officers to close loans) infected the entire underwriting process. Accordingly, the court denied the motion to dismiss as to the remaining claims in the complaint.

Court Holds Coverage for Madoff Suits Excluded Under Policy’s Insolvency Exclusion

Tue, 08 Jun 2010 20:13:45 GMT

The US District Court for the District of Connecticut recently dismissed a customer suit against an insurer, based upon its determination that all of the underlying claims were excluded by the policy’s Insolvency Exclusion.¹ Associated Community Bancorp, Inc., et al. v. The Travelers Companies, Inc., et al. [Click here for a copy of the decision] The insureds alleged that the insurer had wrongfully denied coverage for several lawsuits against the insureds related to their involvement with Bernard L. Madoff Investment Securities, LLC (“Madoff”).

The Policy provided coverage, with certain exclusions, for losses incurred on claims made or discovered during the policy period (6/1/2008 through 9/1/2009) against Connecticut Community Bank, N.A. (“CB”); Westport National Bank (“WNB”); and certain WNB officers and directors, including Mr. Dennis Clark (“Clark”) (all together “Insureds”). Suits were filed against the Insureds by investors who had lost money in the infamous Ponzi scheme run by Madoff. The investors in the underlying suits had entered into custodian agreements with WNB, directing WNB to give Madoff full discretionary authority to invest their funds. The underlying suits sought return of the investors’ lost investments and fees paid to WNB, as custodian.

The Insureds notified their insurer of the underlying suits (all of which were filed during the policy period) and argued that they were entitled to coverage for the suits, including reimbursement for defense costs incurred in defending the underlying suits. The insurer, however, argued that there was no coverage under the Policy because the suits were excluded by the following exclusions contained in the Policy’s Professional Services Liability Coverage Part:

The Insolvency Exclusion;
The Written Representation of Prior Performance Exclusion; and
The Fee Exclusion.

The court agreed that the Insolvency Exclusion excluded coverage for the underlying suits, and, therefore, did not deal with the applicability of the remaining exclusions.

The Insolvency Exclusion provided that the Policy did not cover “Loss [including Defense Costs] on the [sic] account of any claim made against any Insured … based upon, arising out of or attributable to insolvency … receivership, bankruptcy, or liquidation of, or financial inability to pay … by, any … investment company, … or any broker or dealer in securities or commodities.” The insurer argued that the underlying suits all “‘arose out of’ Madoff’s insolvency or inability to pay” because the suits against the Insureds would not have been filed if the investors had been able to recover their funds from Madoff. Accordingly, the insurer argued that coverage was excluded under the Insolvency Exclusion.

The court agreed that the underlying suits were excluded by the Insolvency Exclusion because they were “connected with, incident to, or flow[ed] out of Madoff’s insolvency.” The court found support for its holding under various cases interpreting similar exclusions in other jurisdictions, including one case involving investments in the Evergreen ponzi scheme (Smith v. Continental Casualty Company, 2008 WL 4462120 (M.D. Pa. 2008)).
The Insureds argued that if the Policy were intended to exclude coverage in situations that arose due to the acts of a third party, and not due to acts of the insured itself, the Policy should explicitly provide for that. The court, however, held that the language of the Insolvency Exclusion was unambiguous because the phrase “any claim” meant “just that – any claim,” and reading ambiguity in the exclusion would be torturing the words of the exclusion.

The court also rejected the Insureds’ argument that the Insolvency Exclusion should not apply because “Madoff was not an ‘investment company’ or ‘broker or dealer in securities,’ as defined by the Policy, but instead was a ‘criminal enterprise.’” The court held that the Insolvency Exclusion covered even “sham investment companies” due to the fact that the exclusion applies to claims arising out of the insolvency of “any … investment company.”

Finally, the court rejected the Insureds’ argument that the Insolvency Exclusion did not apply because the terms “insolvency,” “bankruptcy,” and “financial inability to pay” were not meant to cover massive frauds, such as Madoff’s Ponzi scheme. The court, however, held that the underlying suits arose out of Madoff’s bankruptcy, as well as Madoff’s financial inability to pay, and, therefore, there was no ambiguity in the language of the exclusion as applied to the underlying suits.

Based upon this analysis, the court granted the insurer’s motion to dismiss. In addition, the court denied the insureds the right to replead based upon the court’s finding that such repleading would be futile.

¹ After determining that the Insolvency Exclusion, contained in the Professional Services Coverage Part, applied to exclude coverage for the underlying suits, the court also held that coverage was excluded under the Professional Services Exclusion, contained in the Management Liability Coverage Part.

Thousands of Consumers’ Claims for Injuries Arising From Use of Contact Lens Solution Constitute Separate Occurrences

Tue, 08 Jun 2010 20:10:43 GMT

A New York District Court recently held that thousands of claims by consumers for injuries arising from use of contact lens solution would be treated as separate occurrences. Bausch & Lomb Inc. v. Lexington Ins. Co., 08-CV-6260T (W.D.N.Y. Dec. 28, 2009). For a complete copy of the opinion, please click here.

The insured – a manufacturer of a widely used contact lens solution – brought a declaratory judgment action against its umbrella insurer seeking a declaration that the insurer was obligated to provide insurance coverage with respect to thousands of claims asserted by consumers who were injured by use of the insured’s contact lens solution. The insurer denied coverage maintaining that each of the consumers’ claims was a separate “occurrence” under the policies and, as a result, the underlying limit under the umbrella policies had not been exhausted and the attachment point of the umbrella policy not reached on a per claim basis. The insured maintained that all claims brought by users for injuries resulting from use of the lens solution constitute a single “occurrence.”

The court held that in a products case involving an intentionally formulated product, the exposure of each individual to the allegedly defective product, rather than the manufacture, distribution, or sale of the product, constitutes the accident giving rise to liability. Upon concluding that the consumers’ exposure constituted the “incident” giving rise to liability, the court went on to consider whether the incidents could be combined into a single occurrence or whether they each constituted a separate occurrence. In so doing, the court examined whether there was a “close temporal and spatial relationship between the incidents giving rise to injury or loss, and whether the incidents can be viewed as part of the same causal continuum, without intervening agents or factors,” in accordance with the “unfortunate events test.” Because the consumers’ exposure to the contact lens solution occurred in thousands of different locations, as a result of different solutions manufactured at different times and in different locations, and caused different types of injuries over the course of years, the court concluded that there is no close temporal and spatial relationship between the incidents giving rise to the alleged injuries, and there is no basis for holding that the incidents can be viewed as part of the same causal continuum, without intervening agents or factors. In short, the claims did not arise from a single occurrence.

The court went on to hold that the claims could not be grouped under the policies. Grouping provisions in the policies, the court reasoned, typically confirm that one individual’s repeated or continuous exposure on multiple occasions to a harmful condition will not be treated as separate occurrences or treat as a single occurrence the continuous or repeated exposure of multiple persons to harmful conditions that result from a single accident. They are not intended “to group claims where there is no single incident that can be identified as the event resulting in injury to the numerous claimants.” The court considered that each individual’s exposure to the solution was unique and constituted the accident that caused injury. As each exposure was separate and distinct, the court found they could not be grouped under the policies.

Federal Court in Ohio Recognizes Cause of Action for Insurer Bad Faith Outside Claim Handling Context

Tue, 08 Jun 2010 20:04:20 GMT

“Although Ohio courts have generally found independent tort liability only in cases of improper processing and handling of claims,” the U.S. District Court for the Northern District of Ohio held that a claim predicated on an insurer’s failure to refund unearmed premiums can support an independent claim for bad faith. Pate v. Guarantee Trust Life Ins. Co, No. 1:09-cv-2454 (N.D. Oh. Mar. 15, 2010).

In Pate, an insurer was sued in a class action lawsuit after it failed to refund unearned premiums when the insured class members satisfied their car loans prior to maturity. The credit insurance policies issued by the insurer to the class contained a provision requiring the insurer to refund a portion of the premium under such circumstances. As a result, the plaintiffs sued the insurer for breach of contract, unjust enrichment and violation of the duty of good faith and fair dealing.

The insurer moved to dismiss the bad faith count arguing that Ohio does not recognize a cause of action for bad faith outside of the claim handling context. Although the court recognized that bad faith claims in Ohio have typically been confined to the claims handling context, it declined to find that to preclude claims for bad faith in other contexts. Observing the broader rule that “an insurer has a duty to act in good faith towards its insured in carrying out its responsibilities under the policy of insurance,” the court held that the conduct complained of implicated the insurer’s responsibilities under the policy. Accordingly, the court held the plaintiffs’ complaint stated a claim for bad faith.

For a complete copy of the opinion, please click here.

Federal funding for Temporary High-Risk Insurance Pool Program to Begin Summer 2010

Tue, 08 Jun 2010 19:59:53 GMT

In July 2010, some of the first money allocated by the new health care reform law will start flowing to states that have elected to participate in the federal temporary high-risk insurance pool program. These pools are intended to extend insurance coverage to those individuals who have been denied coverage due to a pre-existing condition. Five billion dollars in federal funds will be available to the states through December 2013.

The U.S. Department of Health and Human Services (“HHS”) has proposed allocating funds for the program by using a formula almost identical to what was used for the Children’s Health Insurance Program (CHIP). Specifically, funds would be allotted to states using a combination of factors including nonelderly population, nonelderly uninsured, and geographic cost as a guide.

On April 30, 2010, New York elected to participate in the federal program. New York is eligible for a total potential allocation of $297 million for this period. State officials are assessing possible options for the structure of the program as they await further guidance from the federal government regarding implementation rules.

To view the HHS fact sheet on the federal temporary high-risk insurance pools program, click here.

To view a copy of the New York Insurance Department’s letter of intent to participate, click here.

Iowa Supreme Court Upholds Denial of Coverage to Life Insurer For Failure to Disclose Applicants’ HIV Positive Status

Mon, 07 Jun 2010 19:50:05 GMT

In Farm Bureau Life Insurance Co. v. Chubb Custom Insurance Co. et al., the Iowa Supreme Court affirmed the district court’s ruling that Farm Bureau was not entitled to liability coverage in its disputes with two applicants that were HIV positive.

In the underlying action, two applicants applied to Farm Bureau for life insurance in 1999 but the applications were denied when their blood tests revealed that they were HIV positive. The insurance company did not inform the applicants of their HIV status and it was two years before they discovered that they had the virus. The applicants sued the insurer in 2002 initially alleging as causes of action the failure to inform of HIV status in violation of Wyoming statutory and common law, and then amending in 2005 to assert breach of fiduciary duty. The case settled in 2005. The life insurer did not notify its broker of a claim until February 2003 and the broker in turn did not notify at least one of its insurers until June 2005.

The life insurer subsequently sued its insurers and insurance broker, claiming entitlement to reimbursement for the costs of settlement.

Referring to the contractual obligation of the life insurer to strictly comply with the notice of claims provisions in its professional liability policy, the Court held that the notice was not timely and therefore no coverage was owed under the policy. As for the financial institutions and commercial umbrella general liability policies, both contained exclusions for bodily injury resulting from failure on the part of the life insurer to properly perform its role regarding insurance applications. The Iowa Supreme Court held that the exclusions were not ambiguous or illusory and that the policy language was straightforward in that it was “clearly and explicitly drawn to preclude coverage for the acts and omissions that form the basis for the [underlying] claims against [the insurer].”

A copy of the decision is available here.

Federal Court Rules No Coverage for Chinese Drywall Damages Under Homeowner’s Policy

Mon, 07 Jun 2010 19:42:46 GMT

On June 3, 2010 Judge Robert G. Doumar of the U.S. District Court for the Eastern District of Virginia found that a homeowner’s policy did not cover damages associated with Chinese manufactured drywall. In Travco Insurance Company v. Larry Ward, Larry Ward alleged that the drywall in his Virginia Beach home released sulfuric gases into his home, damaging his air conditioning, garage door and flat-screen televisions. When Ward made a claim under his homeowner’s insurance policy, his insurer sought declaratory relief as to whether there was coverage.

On the insurer’s Motion for Summary Judgment, Judge Doumar found that the damages alleged did constitute a “direct physical loss” within the meaning of the policy. However, the Court found that the policy’s latent defects, faulty materials, corrosion and pollution exclusions excluded coverage for Ward’s damages. The Court also found that none of the losses qualified for coverage under the policy’s ensuing loss provisions. Thus, the Court ruled that the policy did not cover removing or replacing the drywall, or any damages stemming from the drywall. However, the Court would not “categorically rule out” that other, as-yet unclaimed, losses might be covered.

For more information see here.

The opinion can be found here.

Insurers Encourage Green Building

Fri, 04 Jun 2010 19:36:42 GMT

Insurers and regulators are addressing Green Building issues at breakneck speed. With state regulators approving new policy endorsements and insurers offering Green Building discounts, insuring properties that are “green” is here to stay.

On April 29, 2010, the Pennsylvania Insurance Department approved Travelers Insurance’s discounts on “green” homeowners’ products. In order to qualify for the discount, the residence must have the U.S. Green Building Council’s Leadership in Energy and Environmental Design (“LEED”) building certification. According to the press release, Travelers Home and Marine Insurance Company and TravCo Insurance Company will now offer “Green Home” coverage by way of a new endorsement with an additional rate that will extend coverage to pay for additional costs and expenses associated with green building alternatives, personal property green alternatives, and green methods to dispose of covered debris. Travelers Insurance will also offer a 5% “Green Discount” if the residence has a LEED Certification.

On May 31, 2010, Canadian insurance company The Co-operators announced that it would give insureds a 10% discount for eligible Canadian LEED-certified dwellings. In its press release, The Co-operators states that this move “is intended to encourage and reward environmentally responsible behaviour among its clients.” Not only are insurers encouraging their customers to build Green, but some are doing it themselves. Allstate, for example, just obtained LEED Gold certification for its data center located in Rochelle, Illinois.

By 2013, McGraw-Hill Construction estimates that today’s overall green building market will more than double, reaching between $96 -$140 billion for residential and nonresidential buildings. Insuring not only the “green” building, but also the professional services involved in designing and building them, and the materials that go into making a building “green” are also issues that are on insurers’ radar. Stay tuned for regular updates.

A copy of the Pennsylvania Insurance Department’s press release can be found here.

A copy of The Co-operators’ press release can be found here.

A copy of Allstate’s press release can be found here.

New Hampshire Court Dismisses Suit Seeking Coverage Under CGL Policy For Subcontractor’s Faulty Work

Fri, 04 Jun 2010 19:03:52 GMT

EAPD attorneys recently obtained dismissal of a declaratory judgment action seeking coverage under a commercial general liability (“CGL”) policy for the cost of repairing poorly finished concrete. KBE Building Corp. v. American Home Assurance Co., No. 10-C-0012 (N.H. Super. Ct. May 25, 2010).

According to the Complaint, the insured contracted with Wal-Mart to build a new store in Gorham, NH. The insured subcontracted the cement flatwork to a subcontractor. The subcontractor failed to properly finish the concrete slab, “resulting in a soft, easily abraded surface.” As the general contractor, the insured was responsible for the alleged $200,000 cost of repairing the slab. The insured then sought indemnification for these costs under a CGL policy issued by the defendant insurer.

The insurer, represented by EAPD attorneys, moved to dismiss. The insurer argued that faulty work, such as the poorly finished slab, cannot be a covered “occurrence,” does not constitute “property damage,” and is excluded from coverage. The insured responded that because the concrete slab “broke,” there was “property damage,” which can be covered regardless of whether the “damage” consisted of faulty work.

The court granted the insurer’s motion to dismiss, finding that no “property damage” caused by an “occurrence” was alleged. The court noted that the insured was “not actually seeking damages for injury to property; instead, it is seeking damages for the cost of repairing work of inferior quality.” The court further found that, even if the repair of the slab constituted “property damage” caused by an “occurrence,” coverage would be unambiguously excluded. Specifically, the “damage to property” exclusion would apply to exclude damage to “that particular part of real property on which you or any contractors or subcontracts working directly or indirectly on your behalf are performing operations,” as well as “that particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it.”

The court observed that its holding of no coverage was consistent with the established principle that CGL policies do not insure against faulty workmanship.

Click here to read the decision.

UK: Subrogation and Conditional Fee Agreements

Thu, 03 Jun 2010 10:06:00 GMT

In Sousa v London Borough of Waltham Forest (CC (Leeds) (John Behrens) 12/1/2010) the court found that an insurer, having brought a subrogated claim, was entitled to recover from the defendant a success fee paid under a Conditional Fee Agreement (CFA) as part of the insurer's costs of the subrogated claim, in which the insurer had been successful. The court reaffirmed settled law and found that an insurer, when exercising rights of subrogation, is subrogated "to the advantage of every right of the insured", including the right to recover a success fee paid under a CFA.

UK: Northern Ireland to Bring Back Compensation for Pleural Plaques

Wed, 02 Jun 2010 08:26:00 GMT

The Northern Ireland Executive has published its analysis of the responses to its consultation paper on pleural plaques. The paper is the latest from Northern Ireland in the wake of the House of Lords' decision in Johnson v NEI International Combustion [2007] UKHL 39 which found that asymptomatic pleural plaques were not compensatable. Responses from a variety of concerned parties are contained in the paper including medical and legal professionals, unions, political parties and claimants. The responses to the House of Lords' decision in England and Wales and Scotland was also taken into consideration. Having reviewed the information before it, the Northern Ireland Executive has decided that it would follow Scotland's lead and introduce legislation to "restore symptomless pleural plaques as an actionable condition."

If the legislation is successfully introduced it will mean that asymptomatic pleural plaques will be compensatable in Scotland and Northern Ireland but not in England and Wales. If you would like to read the paper please click here.

Lloyd’s Syndicates File Declaratory Judgment Action Against BP

Tue, 01 Jun 2010 14:20:00 GMT

On April 20, 2010, an explosion on the Deepwater Horizon rig in the Gulf of Mexico touched off a subsurface leak in a BP oil well at the ocean’s floor. At the time, the Deepwater Horizon was reportedly conducting drilling activities pursuant to a contract between Transocean Ltd. and Transocean subsidiaries, and BP America Production Company.

Nearly a month later, Transocean’s excess insurers have commenced a Declaratory Judgment action to determine their additional insured obligations to BP with respect to pollution claims against BP for oil emanating from BP’s well. On May 21, 2010, Lloyd’s of London filed a complaint for declaratory relief in U.S. District Court, Southern District of Texas (Houston), asking the court to declare that it and various other excess insurers subscribing excess liability policies issued to Transocean Ltd. (listed in an exhibit to the complaint) have no additional insured or other coverage obligations to BP for remediation and damage claims stemming from the Deepwater Horizon explosion and oil spill. For a complete copy of Lloyd’s complaint please click here.

In Certain Underwriters at Lloyd’s London v. BP P.L.C., Lloyd's asserts that its additional insurance coverage duties with respect to BP do not extend to subsurface releases, based on the terms of the drilling contract between BP and Transocean. According to the Complaint, the contract between Transocean and BP provides that Transocean “shall assume full responsibility for and shall protect, release, defend, indemnify and hold [BP] … harmless from and against any loss, damage, expense, fine, penalty, demand or liability for pollution or contamination … originating above the surface of the land or water from spills, leaks or discharges….” Lloyd’s asserts that the liabilities that BP faces are for pollution emanating from below the surface and from BP’s well, and thus those are not within the scope of the additional insured protection. The complaint also refers to other policy terms and exclusions that may preclude coverage.

According to the Complaint, BP provided or attempted to provide notice of claim on May 14, 2010, and the limits of liability under the policies in issue are, in the aggregate, $700 million.

Needless to say, this is likely to be just the first of several coverage disputes to arise from the Deepwater Horizon explosion.

UPDATE: Texas Moves Closer to Banning Use of Discretionary Clauses In Insurance Contracts

Tue, 01 Jun 2010 13:07:00 GMT

This updates our December 3, 2009 posting.

The Texas Department of Insurance (“TDI”) has officially proposed regulations banning the use of discretionary clauses in insurance contracts. The regulations are the result of a petition filed by the Texas Office of Public Insurance Counsel (OPIC) on October 28, 2009 requesting the ban. Subsequent to the petition, the TDI held a public meeting and made an informal posting on its website.

Discretionary clauses allow insurers to interpret policy terms and evaluate an insured’s claim for benefits. According to the TDI’s official proposal, the ban “is necessary to protect insurance consumers from the possibility of incorrect and unfair coverage determinations by insurers without a subsequent opportunity for a full and independent review under a non-deferential standard.” The TDI is concerned that insurers may have a conflict of interest in coverage determinations that would have an adverse financial impact on the insurer, and therefore want to ensure that insureds have the opportunity to have coverage determinations reviewed by an independent third party.

The TDI is accepting written comments on the official proposal through July 5, 2010. The Texas Insurance Commissioner will consider the adoption of the ban at a public hearing on July 12, 2010.

For additional information, click here to view the TDI’s official proposal.

Federal Court Finds that Limit of Liability Cap in Facultative Certificate Includes a Cedent’s Defense Expenses

Tue, 01 Jun 2010 13:02:00 GMT

Pacific Employers Insurance Company (“PEIC”) entered into a facultative reinsurance certificate with Global Reinsurance Corporation of America, f/k/a Constitution Reinsurance Corporation (“Global”), which reinsured an umbrella commercial liability insurance policy issued by PEIC to Buffalo Forge Company. The “Reinsurance Accepted” provision in the facultative certificate set forth the coverage limits, which were “$1,000,000 any one occurrence.”

Buffalo Forge and its corporate successors were named as defendants in various asbestos products personal injury lawsuits, for which PEIC defended on Buffalo Forge’s behalf, and ultimately indemnified it pursuant to its liability policy. PEIC then sought reinsurance coverage under the facultative certificate from Global.

PEIC commenced an action in the U.S. District for the Eastern District of Pennsylvania, and Global counterclaimed seeking a declaration that the $1 million limit of liability set forth in the facultative certificate was the most that PEIC could recover, with respect to both indemnity and defense expenses. PEIC argued that the $1 million cap did not apply to expenses.

Relying upon case law originating in from the U.S. Court of Appeals for the Second Circuit, the court held that the $1 million limit set forth in the Reinsurance Accepted portion of the facultative certificate clearly and unambiguously encompassed PEIC’s defense expenses. The court noted that had the parties intended for expenses to be excluded from the certificate’s limit of liability, they could have included specific language to that effect. Accordingly, Global prevailed on its counterclaim.

A copy of the District Court’s decision captioned Pacific Employers Ins. Co. v. Global Reins. Corp. of America, 2:09-cv-06055 (E.D. Pa. 2010) can be found here.

Healthcare News from Capitol Hill and the Department of Health and Human Services – June 1, 2010

Tue, 01 Jun 2010 12:57:00 GMT

In late May, the Centers for Medicare and Medicaid Services (CMS) released a supplemental proposed rule that would result in Medicare payment reductions to hospitals. Meanwhile, questions have begun to arise over the future of the Medicare Payment Advisory Commission (MedPAC), given the upcoming inception of the Independent Payment Advisory Board (IPAB) that was created by the new healthcare overhaul law (Public Law 111-148 and 111-152).

CMS PROPOSES HOSPITAL CUTS

Provisions in PL 111-148 and 111-152 to be implemented by CMS will result in Medicare payment reductions across all inpatient hospitals by $820 million in Fiscal Year 2011. CMS put forth these provisions on May 21 in a supplemental proposed rule that will impact more than 3,500 acute care hospitals and roughly 420 long-term care hospitals.

The proposed rule includes healthcare reform provisions that will result in a reduction in the annual update for acute care hospital operating payments and long-term care hospitals. In addition, it includes supplemental payments for qualifying hospitals located in counties that rank among the lowest quartile in the nation in terms of adjusted Medicare spending per beneficiary. In total, when taking into account all of the items that will impact spending, the resulting change in payments across all hospitals that are part of the inpatient prospective payment system (IPPS) is a decrease of $820 million in the upcoming fiscal year.

THE FUTURE OF MEDPAC

The next several years will bring the establishment of IPAB, the new independent board designed by the healthcare reform law to develop and submit proposals to Congress aimed at reducing excess cost growth and improving quality of care for Medicare beneficiaries. In years when Medicare costs are projected to be unsustainable, the Board’s proposals will take effect unless Congress passes an alternative measure that achieves the same level of savings. Such alternative proposals would be considered on a fast-track basis and could be adopted with a three-fifths majority in both the House and Senate.

As discussions get underway to develop IPAB, questions remain over what its establishment will mean for the future of MedPAC – the commission created to advise lawmakers on Medicare policy and payment changes, but whose recommendations are non-binding and often ignored by Congress. Though the new healthcare law contains provisions to keep MedPAC in place, the overlapping functions of the two independent entities has resulted in confusion among policymakers over whether they will ultimately cooperate, compete or merge.

IPAB’s champion in Congress – Senator John Rockefeller (D-WV) – stated recently that he sees the two bodies as having the same review authority, but added that the new IPAB will have the lawmaking authority that MedPAC lacks. “In the natural order of working these out, maybe MedPAC hangs around, maybe it doesn’t,” the Senator said, further indicating MedPAC’s still-uncertain future.

NEXT STEPS:

We will continue to monitor Congress, CMS and other relevant federal agencies as the implementation of healthcare reform moves steadily forward, and will provide timely updates as new developments occur.

Breaking News: FTC Extends Effective Date of Red Flags Rule to December 31, 2010

Fri, 28 May 2010 10:43:00 GMT

On May 28, 2010, the last business day before the June 1, 2010 effective date for the Red Flags Rule, the Federal Trade Commission issued a press release announcing another extension of the enforcement date. The deadline for most companies other than banking institutions to comply with the Red Flags Rule is now December 31, 2010. The FTC granted this delay at the request of certain Congressional members to give Congress time to consider the scope of the Red Flag Rules and its applicability to certain entities.

The last extension was also made only days before the November 2009 effective date to June 1, 2010 following a new bill, HR 3763, which the House of Representatives unanimously approved on October 20, 2009. HR 3763, if passed by the Senate would exempt certain businesses with 20 or fewer employees, including healthcare, accounting and legal firms from the Red Flags Rule.

On May 25, 2010, a parallel bill, S 3416 was introduced and submitted to the Senate Committee on Banking, Housing, and Urban Affairs.

The American Bar Association (“ABA”), American Institute of Certified Public Accountants (“AICPA”), and American Medical Association (“AMA”) have filed actions against the FTC to prevent the FTC from enforcing the Red Flags Rules against its members. On October 30, 2009, the U.S. District Court for the District of Columbia granted the injunction sought by the ABA, thereby barring the FTC from enforcing the Red Flags Rule against attorneys. The ruling, however, may only be a temporary reprieve, as the FTC has decided to appeal the decision.

The AICPA also succeeded in obtaining an injunction. On March 18, 2010, the U.S. District Court for the District of Columbia granted a delay in the enforcement of the Red Flags Rule for AICPA members for 90 days after the U.S. Court of Appeals for the District of Columbia renders an opinion in the ABA’s case against the FTC.

On May 21, 2010, the AMA filed a similar complaint for declaratory and injunctive relief to keep the FTC from enforcing the Rule against its members. For now, attorneys and accountants are not subject to the Red Flags Rule. Until these cases are resolved by the court of appeals, however, the reprieve may be only temporary.

We will continue to monitor any new developments and will provide updates here at www.insurereinsure.com.

Click here to view the official press release from the FTC.

Click here to view HR 3763, and here to view S 3416.

UK: High Court confirms operation of the anti-deprivation principle

Fri, 28 May 2010 09:25:00 GMT

In Justin Mayhew v (1) Philip King (2) Milbank Trucks Ltd (Defendants) & Chaucer Insurance plc (Third Party and Part 20 Claimant) v Towergate Stafford Knight Company Limited & Ors Sir Edward Evans-Lombe held that a term of a settlement agreement which stated that a right to an indemnity would cease if the party with the benefit of the indemnity went into administration was contrary to the anti-deprivation principle and would be struck out.

The claimant, Justin Mayhew (Mayhew) obtained a judgment for damages against Milbank Trucks Ltd (Milbank) in relation to a road traffic accident. Chaucer Insurance plc (Chaucer) was Milbank's insurer, but it refused to pay out due to a general exception contained in the relevant policy. Milbank therefore commenced proceedings against Towergate Stafford Knight Company Limited (Towergate), its brokers, for negligently mis-selling the policy. Milbank and Towergate subsequently entered into a settlement agreement, whereby Towergate agreed to indemnify Milbank for the payments it was due to make to Mayhew. The settlement agreement contained a clause, clause 11, which stated that if Milbank was placed into administration prior to any payment being made by Towergate, Milbank's right to an indemnity would cease to be effective. Milbank was placed into administration before any payment was made by Towergate. Towergate therefore refused to pay any indemnity under the settlement agreement. Milbank's administrators assigned Milbank's rights under the settlement agreement to Chaucer, which brought Part 20 proceedings against Towergate to enforce the settlement agreement and to seek a declaration that clause 11 of the agreement was invalid, as it was contrary to the anti-deprivation principle.

Sir Edward Evans-Lombe held that clause 11 was a clear violation of the anti-deprivation principle. The undertaking by Towergate to indemnify Milbank was clearly an asset of Milbank, which, in the absence of clause 11, would have been available to be realised by the administrators. The clause was not simply putting a time limit on the indemnity, rather, it sought to limit the obligation to indemnify by reference to an insolvency event. Clause 11 was therefore enforceable and Towergate was bound to indemnify Milbank in accordance with the settlement agreement.

The case re-iterates the well known anti-deprivation principle: a court will refuse to give effect to provisions of a contract where such provisions would achieve a distribution of assets of an insolvent company which ran contrary to the normal insolvency rules governing the distribution of assets between the creditors.

UK: Court of Appeal Rules on VAT Exemption for Insurance Intermediaries

Fri, 28 May 2010 09:12:00 GMT

The Court of Appeal handed down its judgment in Commissioners for Her Majesty's Revenue and Customs v Insurancewide.com Services Limited and Trader Media Group Limited [2010] EWCA Civ 422 on 22 April 2010. The case concerned the respondents' VAT status.

The provision by an 'insurance broker' or 'insurance agent' of any of the services of an 'insurance intermediary' is exempt from VAT (article 135(1)(a) of Council Directive 2006/112 EC previously article 13B(a) of the Sixth Council Directive 77/388 EEC and in domestic legislation, Schedule 9, Group 2, Item 4 of the Value Added Tax Act 1994).

In this case, HMRC jointly appealed two judgments from the VAT and Duties Tribunal. In 2007 the Tribunal had ruled that Insurancewide's services did not fall under the exemption and that Trader Media's services did fall under the exemption. Subsequently, however, the Tribunal had, in an order of 15 May 2009, allowed an appeal by Insurancewide of the 2007 decision and denied an appeal by HMRC of the 2007 Trader Media decision. In this joined appeal to the Court of Appeal, HMRC argued that Insurancewide and Trader Media were nothing more than providers of 'click-through' facilities. Insurancewide and Trader Media argued that they were insurance brokers or agents and the services they provided, which introduced the person seeking insurance to the insurer, were those of an insurance intermediary.

Insurancewide.com was a provider of an online service to individuals allowing them to compare insurance cover from various insurance companies. The website provided a means for the individual to contact the insurance provider. Similarly, Trader Media ran a website which included an "insurance centre" through which customers could obtain quotes for car insurance from a panel of selected insurers.

After considering previous European case law and the domestic and European legislation, the Court of Appeal set out a number of principles to apply when determining whether or not an insurance broker or agent is exempt from VAT, the most notable being:

whether or not a person is an insurance broker or an insurance agent, within the ambit of Article 13B, depends on what they do. How they choose to describe themselves or their activities is not determinate;
it is not necessary for the taxpayer to perform precisely the description of activities in Article 2(1)(a) or (b) of the Insurance Directive;
it is not necessary for a person to be carrying out all the functions of an insurance agent or broker. It is sufficient if a person is one of a chain of persons bringing together an insurance company and a potential insured and carrying out intermediary functions;
the above principles must be applied to the Insurance Intermediary Exemption in Schedule 9 of the Value Added Tax Act 1994 so that the interpretation of domestic law reflects the jurisprudence of the European Court of Justice.

Applying these principles, the Court of Appeal held that Insurancewide and Trader Media were more than mere conduits and so fell within the exemption. It was sufficient that they were providing services characteristic of an insurance broker or agent, and which were vital to the process of introducing those seeking insurance with insurers, even if they were only part of a chain of such persons. HMRC's request that the Court of Appeal refer the cases to the European Court of Justice for a preliminary ruling was also dismissed by the Court of Appeal.

The judgment can be found here: http://www.lawtel.com/UK/Document.ashx?AC0124499CA(CivDiv).pdf

Jury Finds in Favor of Botox Manufacturer in Off-Label Use Trial

Fri, 28 May 2010 08:31:00 GMT

A California jury recently returned a verdict in favor of Allergan, Inc., in a trial involving claims that Allergan’s promotion of an off-label use of its drug Botox caused the death of a pediatric patient suffering from cerebral palsy. Kramer v. Allergan, Inc., No. 30-2008-00180033-CU-MT-CXC (Cal. Super. Ct. Orange Co. March 11, 2010).

The plaintiff, mother of the decedent, claimed that Allergan promoted the use of Botox to treat limb spasticity in pediatric patients with cerebral palsy, and that Allergan sales representatives made sales calls to the decedent’s pediatrician despite the lack of any approved pediatric uses of Botox. The plaintiff further alleged that the use of Botox caused her child to suffer fatal seizures.

In a 10-2 vote, the jury found that Allergan had provided adequate warnings about the use of Botox.

Learned Intermediary Doctrine: Eleventh Circuit Upholds Summary Judgment in Favor of Manufacturer in Lawsuit Claiming Antidepressant Caused Suicide

Fri, 28 May 2010 08:26:00 GMT

The 11th Circuit Court of Appeals recently relied upon the learned intermediary doctrine in affirming summary judgment in favor of Smithkline Beecham Corp. (“SBC”) in a lawsuit claiming that the antidepressant Paxil caused the decedent to commit suicide. Dietz v. Smithkline Beecham Corp., No. 09-10167 (11th Cir. March 5, 2010).

In Dietz, the plaintiff’s late husband was diagnosed with major depression by his family doctor, who gave him a prescription for Paxil. The decedent committed suicide shortly after he began taking Paxil. The plaintiff sued SBC based on theories of strict liability, negligence, and breach of warranty. During his deposition, the family doctor testified that he had considered the risks and benefits associated with Paxil before prescribing it and that, after reviewing the latest research on Paxil and suicide, he still considered his decision to be appropriate in light of all the circumstances.

Applying Georgia law, the lower court granted summary judgment in SBC’s favor on all of the plaintiff’s claims and the appeals court now affirmed. The appeals court based its decision on the learned intermediary doctrine, which holds that the manufacturer of a prescription drug does not have a duty to warn a patient of the dangers involved with its product. Instead, the manufacturer has a duty to warn the patient’s doctor, who “acts as a learned intermediary between the patient and the manufacturer.” The doctrine is based on the rationale that the doctor is in a better position to warn the patient, because the decision to prescribe or not to prescribe medication depends on the doctor’s “knowledge of the patient’s particular needs and susceptibilities.”

In applying the doctrine, courts usually engage in a two-step inquiry: (1) Did the manufacturer provide the intermediary with an adequate warning? (2) If not, has the plaintiff demonstrated that the deficient warning proximately caused the alleged injury? In Dietz, because the doctor testified that he would have prescribed Paxil to the plaintiff’s decedent even after reviewing the latest research regarding Paxil and suicide, the court found that the plaintiff could not establish proximate cause.

Please click here to read a copy of the court’s decision.

Emerging Trends In Asbestos Litigation

Thu, 27 May 2010 11:25:00 GMT

On Tuesday, May 25, EAPD partners and associates from the US and the UK presented a webinar on Emerging Trends in Asbestos Litigation. The recording and slides are available here (Please remember to turn the sound function of your computer to 'ON' to hear the recording.)

Areas discussed include important developments in liability for US companies with respect to alleged injuries sustained at foreign subsidiaries, and the implications on asbestos litigation trends should a particular decision come down in favor of the non-US-based plaintiffs. Speakers also introduced important questions about allocation of aggregated settlements and reinsurers’ responsibility to honor cedents’ payment; and where arbitration panel decisions on these questions have tended to fall. The UK portion of the program introduced a compelling perspective on the potential onslaught of asbestos cases and the Employers’ Liability policy trigger litigation. There was discussion on the current position on the right to compensation for pleural plaques and the developing issues regarding insurance and reinsurance coverage for asbestos disease claims. This was followed by the final segment of the program which summarized regional trends and asbestos regulatory and legislative policies using contrasting evidence in Western European and Eastern European countries.

UK: Report published on anti-bribery and corruption in commercial insurance broking

Wed, 26 May 2010 15:17:00 GMT

The Financial Services Authority (FSA) has recently published a report entitled "Anti-bribery and corruption in commercial insurance broking: Reducing the risk of illicit payments or inducements to third parties". Please click here to review the report.

The report follows a review carried out by the FSA between December 2008 and January 2010 to assess how commercial insurance brokers in the UK are addressing the risks of involvement in corrupt practices, such as bribery. The report sets out the FSA's findings and includes examples of good and poor practices in specific areas, such as due diligence and incident reporting. The FSA concluded that the approach of broker firms to higher risk business with third parties has been far too informal and that many firms are not operating at acceptable standards. The FSA also noted that there were serious weaknesses in some broker firms' systems and controls which had led to a significant risk of illicit inducements being paid to third parties in order to win business. The FSA also found that many firms could not demonstrate that they had adequate procedures in place to prevent bribery, which is a defence to the Bribery Act 2010 criminal offence of "failing to prevent bribery".

While the report is not formal guidance from the FSA, the FSA has noted that it expects firms to review its findings and to implement and maintain more effective controls where necessary. The FSA has also stated that the report's findings and the examples of good and poor practices will be relevant to firms in other sectors.

Fitch Ratings Views Central American Insurance Prospects As Mixed

Wed, 26 May 2010 14:22:00 GMT

Prospects are mixed for the Central American insurance sector in 2010, according to a study by Fitch Ratings, with countries such as Costa Rica expected to build on their healthy growth in 2009 while others struggle to recover from the global downturn.

The rating agency said that although economic conditions would likely keep premium incomes depressed, the potential for greater market penetration would provide opportunities for growth through the introduction of products with mass appeal. In Costa Rica, for example, new market participants such as Aseguradora Mundial-Mapfre, Alico and Assa were expected to gain substantial market share through new products and aggressive marketing strategies. However, new regulations and slow overall premium growth could provide challenges.

In Guatemala, which like Costa Rica has a high loss ratio, proposed legislative changes include higher reserve requirements and stricter solvency margins. This capital strengthening should bring the market more into line with international standards and provides reason for optimism.

The market in El Salvador, which is already dominated by international companies, continues to see improvements in operational efficiency but the tough economic environment appears to be negatively impacting loan delinquencies and premium receivables, Fitch said.

The two smallest markets, Honduras and Nicaragua, saw improved loss ratios in 2009 but the Honduran market remained highly concentrated and Nicaraguan insurers were reported as the least efficient in Central America. The latter, however, saw the largest net premium growth in the region during the first half of 2009 at 6.7% and the life insurance sector in particular saw strong growth as bankassurance and mass life insurance products have been developed.

One factor which kept premium growth low throughout the region in 2009 was a marked reduction in new car sales, while a general increase in car theft had a negative impact on loss ratios.

UK: Court of Appeal seeks guidance from Europe on an insurer's right of recovery under the Road Traffic Act 1988

Wed, 26 May 2010 10:23:00 GMT

The Court of Appeal has asked for guidance from the Court of Justice of the European Union on the compatibility with Community law of a provision in the Road Traffic Act 1988 (the RTA) governing an insurer's right of recovery.

The two cases of Churchill Insurance Co Ltd v Benjamin Wilkinson (by his father & litigation friend Steven Wilkinson) and Tracey Evans v Equity Claims Ltd [2010] EWCA Civ 556 were heard together by the Court of Appeal. They were both appeals from judgments which had relied on opposing interpretations of section 151(8) of the RTA. The facts were strikingly similar: the persons injured were travelling in or on vehicles which they were insured to drive, but the negligent driver of the vehicles was uninsured, and was driving with their permission. In Wilkinson, permission was given with the knowledge that the driver was uninsured, and the first instance judge found that insurers could not recover the compensation paid to him; in Evans, permission was given without any thought to whether the driver was insured, but the judge found that insurers could reclaim the compensation from her.

S.151(8) provides that where an insurer becomes liable to pay in respect of a liability of a person who is not insured by a policy, it is entitled to recover from a person who is insured by the policy and who caused or permitted the use of the vehicle which gave rise to the liability. The Court of Appeal held that under English law, the effect of s.151(8) was to exclude from the benefit of insurance a passenger in these circumstances. However, it queried whether such an exclusion was void and unenforceable under Community law, and also whether s.151(8) could be interpreted so as not to breach Community law. The Court referred to Article 12 of Directive 2009/103/EC which seems to preclude excluding from compensation a passenger who was insured under the policy. However, it was not clear whether that was still the case even when the insurer could prove that the insured passenger knew the driver was uninsured. It was also unclear whether knowledge of the driver being uninsured or belief that he was insured would be relevant to the insurer's right of recovery in these circumstances.

The questions referred to the Court of Justice were whether s.151(8) in its present form complies with Community Law and/or whether with some amendment or reinterpretation as to the degree of the insured's knowledge might lead it to comply. We will report on any further developments when they arise.

UK: Court Considers the Recoverability of After the Event Insurance Premium

Tue, 25 May 2010 10:51:00 GMT

In the case of Kris Motor Spares Limited v Fox Williams LLP [2010] EWHC 1008 the High Court was asked to consider whether the successful party's after the event insurance premium was reasonable and as such could be recovered from the other side. The obtained cover was for £130,000 for which the party paid a premium of £95,550, a rate of 73.5%. The paying party argued that this rate was excessive.

The court found that, "in a case where the issue is raised as to the size of the premium there is an evidential burden on the paying party to advance at least some material in support of the contention that the premium is unreasonable…[I]t [is] not in the insurer's interest to fix a premium at a level which would attract frequent challenges; and…a Master…[is] not in a better position than the underwriter to rate the financial risk that the insurer faced." In this case, the paying party did not bring forward any relevant evidence and so the judge ruled that the premium could be recovered.

Parties who are contemplating after the event insurance as a safety net when nearing litigation will find this judgment comforting. The judge has clearly found that, barring strong evidence to the contrary, a premium set by the underwriter will be considered reasonable by the court.

UK: Court of Appeal rules on causation issues following negligent professional advice

Mon, 24 May 2010 08:12:00 GMT

In Levicom International Holdings BV and anr v Linklaters (a firm) [2010] EWCA Civ 494, Levicom appealed against the first instance decision of Mr Justice Andrew Smith that, although Linklaters had negligently advised Levicom, Levicom had suffered no damage as a consequence because it would have proceeded in the manner that it had even if it had received non-negligent or proper advice. As such, Smith J awarded only nominal damages plus costs.

Linklaters had been instructed to advise Levicom on possible breaches of a shareholder agreement to which Levicom was a party. Levicom submitted that, having received negligent advice from Linklaters, it had lost an opportunity to accept and/or negotiate an early settlement offer due to its belief in the strength of its position.

In his decision, Smith J set out four considerations that contributed to his finding that Linklaters' negligence had no causative effect:

Levicom could not show, in respect to the stance that it had taken in negotiations, whether weight was placed on Linklaters' advice or on commercial considerations;
Levicom could not show that, if having received proper advice, it would have adopted a more compromising position;
Levicom knew that there was some risk that it would not succeed in obtaining substantial damages; and
Levicom was reluctant to accept Linklaters' advice on quantum.

The Court of Appeal agreed with Smith J's finding that Linklaters had been negligent in its advice. However, it found his decision on causation to be flawed. The court considered that the evidential burden should have shifted to Linklaters; it was for Linklaters to prove that its advice was not causative. Lord Justice Jacob neatly summarised the issue of causation:

"When a solicitor gives advice that his client has a strong case to start litigation rather than settle and the client then does just that, the normal inference is that the advice is causative [emphasis added]. Of course the inference is rebuttable - it may be possible to show that the client would have gone ahead willy-nilly ... The Judge should have approached the case on the basis that the evidential burden had shifted to Linklaters to prove that its advice was not causative."

Lord Justice Stanley Burnton remarked that "one has to ask why a commercial company should seek expensive City solicitors' advice (and do so repeatedly) if they were not to act on it. I think that the evidence that a client did not act on advice in a case such as the present must be stronger than that which persuaded the judge".

A further hearing is expected to determine the quantification of damages.

This case has highlighted the burden that has been placed on solicitors, which may impact on their professional indemnity insurers, when advising clients as to whether to settle early or proceed with litigation or arbitration. It continues to provide a timely reminder as to the importance of contemporaneous evidence of advice and discussions between a solicitor and his client.

To view the decision in its entirety please click here http://www.bailii.org/ew/cases/EWCA/Civ/2010/494.html

Wisconsin Governor Signs Life Settlement Law

Wed, 19 May 2010 12:20:00 GMT

On May 13, 2010, Wisconsin Governor Jim Doyle signed into law Senate Bill 513 (“SB 513”) governing life settlements. SB 513 is a hybrid of the NAIC Viatical Settlements Model Act and the NCOIL Life Settlements Model Act, and includes a requirement that life insurance policies be in force for at least 5 years before they can be sold in the secondary market. There are exceptions to this requirement, such as in the case of a critical illness. The 5 year requirement has the effect of hindering stranger originated life insurance transactions (commonly referred to as STOLI transactions).

In addition to the 5 year requirement, SB 513 also:

Requires that life settlement providers and brokers obtain licenses from the insurance commissioner;
Imposes anti-fraud provisions, including creation of antifraud programs by brokers;
Requires that the amount paid in a life settlement transaction be less than the death benefit, but more than the cash surrender value;
Requires that providers and brokers provide policy owners selling policies with certain disclosures, including disclosure of the broker’s compensation;
Requires disclosure to life settlement purchasers of the qualifications of the person determining the life expectancy of the insured person; and
Requires life settlement providers to send written notices to insurers of the life settlements within 20 days of the owners’ agreement to sell the applicable policies.

Click here for a copy of SB 513.

Massachusetts Supreme Judicial Court Defines Contours of Statute Regulating Indemnification (But Not Insurance Provisions) in Lease Agreements

Tue, 18 May 2010 13:14:00 GMT

The Massachusetts Supreme Judicial Court recently held that G.L. c. 186 §15, which makes void any indemnification agreement or provision whereby a tenant is obligated to indemnify a landlord, in whole or in part, for the landlord’s own negligence, does not apply to insurance provisions in the lease agreement. Norfolk & Dedham Mutual Fire Insurance Company v. Morrison, et al., No. 456 Mass. 463 (2010). Click here for a copy of the Supreme Judicial Court’s Opinion.

The underlying claim in Morrison was brought by the patient of a tenant at a commercial office space. The patient had been injured in the common area of the building and sued both the landlord and the tenant for her injuries. The landlord demanded that the tenant and the tenant’s insurer defend and indemnify it in the suit, pursuant to two provisions in its commercial lease with the tenant. In the first provision, the tenant agreed to indemnify the landlord for personal injuries arising out of the use of the premises by the tenant except were the injuries resulted from the sole negligence of the landlord. In the second provision, the tenant agreed to secure and carry liability insurance insuring both the tenant and the landlord against any claims of bodily injury arising out of the condition of the leased premises, including any common areas. The tenant’s liability insurer filed a declaratory judgment action arguing that these provisions in the lease were void under G.L. c. 186 §15.

Massachusetts statute G.L. c. 186 §15, provides that “any provision of a lease … whereby a lessee or tenant … enters into a covenant, agreement or contract … the effect of which is to indemnify the lessor or landlord … from any or all liability to the lessee or tenant, or to any other person, for any injury, loss, damage or liability arising from any omission, fault, negligence, or other misconduct of the lessor or landlord on or about the premises … shall be deemed to be against public policy and void.”

After holding that G.L. c. 186 §15 applied to commercial leases, an issue that had not previously been decided by the court, the Supreme Judicial Court next addressed whether the indemnity provision in the lease was void under G.L. c. 186 §15. The Court held that the indemnity provision was not void insofar as it applied to only liability and injury directly resulting from the negligence of the tenant. The Court held, however, that the portion of the indemnity provision that required the tenant to indemnify the landlord except for the landlord’s sole negligence, was void pursuant to the statute because this provision required the tenant to indemnify the landlord even where the landlord and tenant were jointly negligent.

Next, the Court held that the provision in the lease requiring the tenant to obtain insurance for the benefit of both the tenant and the landlord did not violate G.L. c. 186 §15. The Court first noted that unlike an indemnity provision, which requires the tenant to take responsibility for the negligence of the landlord; an insurance provision simply requires the tenant to procure insurance for the benefit of the landlord. In other words, the Court found that it is not void as against public policy to require the tenant to purchase insurance which covers the landlord’s liability. In so doing, the Massachusetts Supreme Judicial Court concurred with the courts in several other jurisdictions (including Alaska, Florida, Illinois, Nevada, and New York) which have recognized the distinction between contractual terms obligating one party to carry insurance for the benefit of another from indemnification provisions.

SDFL Judge Finds for Wachovia in Unique Auction Rate Securities Suit

Tue, 18 May 2010 13:09:00 GMT

A federal judge in the United States District Court for the Southern District of Florida recently issued findings of fact and conclusions of law following a bench trial in favor of Wachovia in a suit brought by investors who were unable to liquidate certain Auction Rate Securities (“ARS”) originally purchased through Wachovia. Click here to view the Findings of Fact and Conclusions of Law. This case presented an interesting twist on the fact pattern typically present in ARS suits because the plaintiffs had actually terminated their client relationship with Wachovia and transferred to Smith-Barney several months prior to the collapse of the ARS market. The judge found not only that Wachovia owed no duty to its former clients, but also that Wachovia’s original recommendation to invest in ARS was not a breach of its fiduciary duty because “ARS were widely-used as short-term investments, and were widely-regarded as safe, liquid and appropriate investments.”

In 2006, Plaintiffs had invested with Wachovia’s Wealth Management Group. Plaintiffs gave Wachovia absolute discretion over their investments, the proceeds of a real estate deal, with the understanding that Wachovia was aware that plaintiffs were only interested in “safe, highly liquid investments of a short-term nature.” Wachovia primarily invested the plaintiffs’ money in ARS. While plaintiffs were customers of Wachovia, they were able to freely sell their ARS.

Plaintiffs, however, were unhappy with the fees charged by Wachovia in comparison to the return on their investments and decided to switch to Smith-Barney in June of 2007. Rather than liquidating their ARS upon the transfer, however, the plaintiffs merely notified the necessary broker-dealers that the ARS had been transferred from Wachovia to Smith-Barney.

After the transfer, Smith-Barney recommended that the plaintiffs liquidate their ARS, and the plaintiffs agreed. Plaintiffs and Smith Barney, however, believed that they required further information from Wachovia in order to liquidate some of the remaining ARS. Plaintiffs requested information from Wachovia in order to liquidate the remaining ARS. Wachovia provided some information to the plaintiffs, but Smith-Barney believed that they did not receive all of the information necessary to liquidate the remaining ARS. By the end of 2007, Wachovia had liquidated all of the ARS held by its Wealth Management Group customers. Plaintiffs, however, did not liquidate their ARS because they continued to believe that they needed further information in order to do so.

The only claims that remained for the bench trial were breach of fiduciary duty and negligent misrepresentation. Essentially, plaintiffs’ breach of fiduciary duty claims against Wachovia were that it had: engaged in self-dealing by placing its own interests before plaintiffs and not acted in plaintiffs’ best interests; failed to make appropriate investment recommendations; and failed to disclose the risks associated with ARS to plaintiffs.

The judge, however, found that Wachovia’s fiduciary duties ceased upon the termination of plaintiff’s relationship with Wachovia (pursuant to the terms of their contract). Furthermore, the judge emphasized that even if Wachovia had a duty to the plaintiffs, “given the fact that the possibility of the ARS market failing was deemed to be highly remote and speculative, the mere fact of a fiduciary relationship would not transform Wachovia into an ultimate insurer for any unforeseen events.”

As to plaintiffs’ claim that Wachovia had breached a fiduciary duty by recommending ARS in the first place, the court again relied on the testimony showing that the likelihood of the collapse of the ARS market was highly remote. According to the court, “[t]o hold otherwise, would impose a fiduciary duty upon Wachovia to be clairvoyant in its investment recommendations and require Wachovia to be an insurer of all the plaintiff’s investments.”

Similarly, with respect to negligent misrepresentation, the court noted that throughout the plaintiffs’ client relationship with Wachovia, plaintiffs were able to obtain cash and had access to liquid assets. The court again reiterated that it was widely accepted in the industry that ARS were safe, liquid investments, just as Wachovia had represented to plaintiffs. Accordingly, the court also found that plaintiffs had not proven that Wachovia’s actions constituted negligent misrepresentation.

Senate Expected to Wrap Up Debate on Financial Reform Bill

Mon, 17 May 2010 16:12:00 GMT

After more than two weeks of floor consideration, the Senate entered into what is likely its final week of debate on its financial overhaul legislation – S. 3217.

Senate Majority Leader Harry Reid (D-NV) is expected to file a cloture motion that would limit remaining amendment debate and pave the way for a vote on final passage of the legislation. In order to succeed, the cloture motion must garner 60 votes – a threshold that requires Democrats to secure at least one Republican vote.

The financial reform measure has been considered under an open amendment process, which has resulted in more than 200 amendments filed from both sides of the aisle. The bill’s sponsor, Senate Banking Chairman Christopher Dodd (D-CT), has indicated support for several dozen pending amendments, many of which could be combined into a larger manager’s amendment this week in order to speed up the process.

Majority Leader Reid, who initially sought to wrap up consideration of S. 3217 by the end of last week, has stressed the need to complete the bill in a timely manner so that the Senate can move on to other pressing matters – such as long-stalled tax extenders legislation and possibly a supplemental appropriations measure – before Congress breaks for a weeklong recess on May 28.

We will continue to monitor this process closely and provide updates on InsureReinsure.com.

China: Chinese Consider Revising Plan for a Super Regulator

Fri, 14 May 2010 13:15:00 GMT

China is considering reviving its plan to set up a super regulator in order to make the government's oversight of the financial sector more efficient and expedient and improve the lack of integration and co-ordination between existing regulators. This is especially important as the financial sector becomes increasingly integrated (for example it is now possible for banks to invest in insurance companies and vice versa).

The new "super regulatory agency" would sit above the agencies currently in charge of the country's insurance (the China Insurance Regulatory Commission), banking (the China Banking Regulatory Commission) and securities (the China Securities Regulatory Commission) industries. The new agency, which may be led by a vice-premier, would coordinate financial supervision and monetary policymaking alongside the central bank, the People's Bank of China.

The Chinese government previously considered establishing the super regulator at its last five-yearly national financial work conference in 2007 but did not progress beyond the planning stage. However, the plan for the super regulator could be announced this year, amid reports that the next financial work conference, which is not due to be held until 2012, could be moved to the second half of this year. At the work conference the Chinese government intends to discuss the establishment of the super regulator as well as other strategic issues.

UK: Commercial Court Considers Follow the Settlements Clause, Allocation and Recoverability of IBNR

Fri, 14 May 2010 08:58:00 GMT

IRB Brasil Ressegurous SA v CX Reinsurance Company Ltd [2010] EWHC 974 (Comm) concerned an appeal brought by IRB in relation to an arbitration award made in favour of CX Re and against IRB. The claims arose from losses occurring in the 1970s and 1980s which were later settled by insurers, including CX Re. The losses related to liabilities on products such as silicon breast implants, products derived from contaminated blood and asbestos exposure. CX Re was reinsured by IRB.

The reinsurance contracts between CX Re and IRB contained a double proviso follow the settlements clause which read: "all loss settlements made by the Reinsured, including compromise settlements, shall be unconditionally binding upon Reinsurers provided such settlements are within the conditions of the original policies and/or contracts and within the terms of this reinsurance…". IRB noted that the requirements to prove losses under the double proviso clause were those set out in Hill v Mercantile & General and Equitas v R&Q (previously blogged here), which together required the reinsured to prove, as a matter of law, that the settlements were within the terms of the inwards policy and the outwards policy; the requisite standard of proof being on the balance of probabilities. IRB argued that the Arbitrators, holding IRB liable to indemnify CX Re for the settled losses, had suggested in their Award that it was sufficient to meet the requirements under the double proviso clause that the losses were "arguably" within the terms of the inwards policy and the outwards policy. Burton J endorsed the requirements set out in Hill and Equitas and found that the Arbitrators' references to "arguably" were unfortunate but were not intended to depart from those requirements, which Burton J found the Arbitrators had correctly identified and applied.

Burton J also addressed an "allocation issue", determined by the Arbitrators in their Award, which concerned whether the losses settled by CX Re occurred within the periods covered by the reinsurance policies. The Arbitrators had concluded that the settlements reached by CX Re, pursuant to CIP, Buy Back, commutation and compromise settlement agreements, were within the relevant periods of coverage of the reinsurance policies since there was a reasonable and businesslike allocation of liabilities to the relevant periods of cover, including the periods covered by the reinsurance policies. Significantly, this reasonable and businesslike allocation of liabilities included CX Re's liability for "future claims" (i.e. IBNR – it seems there was no disagreement over the recoverability of outstandings). Burton J agreed with the Arbitrators' findings, endorsing the recoverability of IBNR settlements under reinsurance contracts with a double proviso follow the settlements clause. The Arbitrators had identified and applied the correct standard of proof in their consideration of all aspects of the clause. The appeal was dismissed.

This case will have significant implications for the recoverability of loss settlements from reinsurers where there are allocation issues, including the allocation of IBNR.

New Jersey Insurance Commissioner Praises Captive Insurance Bill and Unveils Reinsurance and Surplus Lines Initiative

Thu, 13 May 2010 10:13:00 GMT

In a news release issued by the State of New Jersey Department of Banking and Insurance ("DOBI") on May 7, 2010 (the "News Release"), DOBI Commissioner Tom Considine applauded two pieces of proposed legislation which, he said, “would make some common sense changes to regulation and allow captive insurers, and carriers of reinsurance and surplus lines to operate more expansively in New Jersey.”

Assembly Bill 2360 (AB 2360), which would permit a captive insurance market to exist in New Jersey, has successfully moved through the Assembly Financial Institutions and Insurance Committee ("AFIC"). AB 2360 is based on Vermont's captive insurance bill, which is viewed as the state model with the best design for the captive insurance market so far.

The News Release also unveiled a forthcoming bill that would (a) incentivize the most financially sound reinsurers to do business in New Jersey by affording reinsurers more flexibility in how they deploy their capital; and (b) amend state law to permit surplus lines insurers domiciled in New Jersey to write surplus lines insurance in the state. The proposed bill would make New Jersey the second state in the U.S. after Illinois to allow its domestic surplus lines companies to write insurance in the home state’s surplus lines market.

Click here to view AB 2360 and click here to view the AFIC Statement on AB 2360. To view the News Release, click here.

U.S. Supreme Court Rules on Class Arbitration, Addresses Manifest Disregard of the Law

Wed, 12 May 2010 15:21:00 GMT

Petitioners (“Stolt-Nielsen”) entered into a contract with respondent AnimalFeeds International Corporation that contained an arbitration clause. After a dispute arose between the parties, AnimalFeeds sought arbitration on behalf of itself and a class of customers who had purchased services from Stolt-Nielsen. The parties agreed that the arbitration clause was silent on whether class arbitration was permissible, and submitted this question to a panel of arbitrators. The panel ruled in AnimalFeeds favor and found that class arbitration was allowed.

Stolt-Nielsen moved vacate the award in the U.S. District Court for the Southern District of New York, which granted its motion on the grounds that the arbitration panel’s award was made in “manifest disregard” of the law because they failed to conduct a choice-of-law analysis in determining whether class arbitration was proper. On appeal, the U.S. Court of Appeals for the Second Circuit reversed the District Court’s decision. The U.S. Supreme Court then granted certiorari.

The Supreme Court reversed the Second Circuit’s ruling, finding that the arbitration panel had exceeded its powers under 10(a)(4) of the Federal Arbitration Act (“FAA”) by failing to conduct any substantive analysis in determining whether class arbitration was proper. To that end, the Court noted that the arbitrators had not based on their decision on any rule derived from the FAA, maritime law (which was relevant to the parties agreement) or New York law (the situs of the arbitration). Thus, the Court found that the arbitration panel did not interpret and enforce the parties agreement, but simply imposed its own view of “sound policy” concerning class arbitration.

Although both the District Court and the Second Circuit addressed manifest disregard of the law in their decisions, the Supreme Court did not decide whether this doctrine survived its decision Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576 (2008) as an independent basis for vacatur or modification of arbitral awards, or as a judicial gloss on the enumerated grounds set forth in Section 10 of the FAA. However, the Supreme Court noted in a footnote that assuming that the “manifest disregard of the law” standard in the Second Circuit applied, it was satisfied.

Click here to review a copy of the U.S. Supreme Court’s decision, captioned Stolt-Nielsen S.A. et al. v. AnimalFeeds International Corp., No. 08-1198 (Apr. 27, 2010).

HK: Insurers Win at Court of First Instance in Severe Acute Respiratory Syndrome Claim Dispute

Wed, 12 May 2010 09:26:00 GMT

In World Harbourview Hotel Co. Ltd & Others v ACE Insurance & Others [2010] HKCFI 327, the High Court of the Hong Kong Special Administrative Region Court of First Instance considered a claim filed under insurance policies in respect of business interruption suffered as a result of the outbreak of Severe Acute Respiratory Syndrome (SARS) in 2003.

In January 2007 ten of Hong Kong's major hotels and developers under the New World Development flag (the Claimants) filed a claim against six insurers (Ace, AXA, Falcon, Liberty International, Tugu and XL) (the Defendants) for a total of HK$300 million (approximately US$40 million) (of which HK$150 million had already been paid) based on two identical insurance policies taken out in 2002 (the Insurance Policies). Clause 14.5 of the Insurance Policies provided that the policy "extended to insure actual loss sustained by the Insured, resulting from a Reduction in Revenue and increase in Cost of Working as a result of… closure by a competent authority due to … notifiable human infectious disease occurring within 25 miles of the Premises".

The Claimants submitted that insurance cover for losses during the outbreak of SARS should date either from 13 February 2003, the date when the Hospital Authority first notified the Department of Health of confirmed cases of SARS in China, or, if not then, from 21 February 2003 when the first infected person arrived in Hong Kong and checked into the Metropole Hotel, the place at which the first case of SARS in Hong Kong originated. The Defendants' position was that insurance cover (under the Insurance Policies) for losses during the outbreak of SARS should date from 27 March 2003 when it became mandatory to report SARS pursuant to the Quarantine and Prevention of Diseases Ordinance (Cap 141).

Mr Justice Anselmor Reyes, agreeing with the argument of the Defendants, held that "notifiable" within the Insurance Policies must be contractually certain and, therefore, denotes a legal or mandatory requirement to notify. As such, he found that the Claimants were not covered under the Insurance Policies until after 27 March 2003. The judge gave the Claimants a general liberty to appeal the decision, although it is not clear at the time of writing whether the Claimants intend to do so.

This judgment in respect of the starting date of SARS in Hong Kong will result in a difference of tens of millions of Hong Kong dollars to the claim of the Claimants. The decision clearly illustrates the importance that a judge will place on contractual certainty when interpreting an insurance policy. Insurers must, therefore, take care to avoid ambiguous terms when drafting their insurance policies.

Connecticut Attorney General Wins in Landmark Contingent Commissions Case

Mon, 10 May 2010 08:49:00 GMT

In a first-of-its-kind victory for a state attorney general, the office of Connecticut Attorney General Richard Blumenthal won its case against an insurance brokerage whom the court found to have failed to disclose to consumers the contingent commissions it received from certain insurers.

Contingent commissions are legal payments that brokers receive from insurers on top of the commission compensation approved by state insurance regulator. Contingent commissions are often paid to brokers based on the strength of the broker’s book-of-business. The more profitable the book, the higher the contingent commission. However, according to the Attorney General’s allegations, a conflict-of-interest occurs when the broker is incentivized to place insurance with a particular insurer because it pays a higher contingent commission rather than with the insurer who is in the client’s best interest.

The Attorney General’s case was built around the failure of the broker to meet its fiduciary duty to be “open and honest with its clients” as reported in a press release by Blumenthal’s office. Such contingent commissions, the Attorney General contends, are a conflict-of-interest, worthy of disclosure to consumers. Therefore, failure to make such disclosure would result in a breach of the broker’s fiduciary duty its clients.

In the instant case, at the corporate level, the brokerage entered into separate agreements with a few select insurers that would allow those insurers to get a “first shot” at the broker’s clients in exchange for an undisclosed commission. These separate agreements were not known to the broker's clients.

Prior to the outcome of the case, the brokerage was sold to a national bank. The court’s decision did not assess a fine or penalty, but rather ordered the bank to identify and eventually disgorge its profits associated with the business practices the court found to violate Connecticut law.

The bank has appealed the decision. Depending on the outcome of the appeal, this decision could lay the ground work for future cases against brokers that fail to disclose contingent commissions to clients.

To see a copy of the Memorandum of Decision and the appeal filing, click here.

EU: Solvency II delayed

Mon, 10 May 2010 08:42:00 GMT

Solvency II will be delayed until 31 December 2012, the EU has confirmed.

Speaking on 4 May 2010 at a public hearing on Solvency II, Michael Barnier, European Commissioner for Internal Market and Services, confirmed that the two month delay was in order to bring implementation of the regime into line with the financial year end of most European insurance undertakings. Mr Barnier also used the opportunity to highlight the importance of participation in the forthcoming QIS5 exercise and provide a very brief summary of the regime's objectives, being to:

strengthen the solidity of insurers and the security of those insured, and thus the stability of the European financial system;
establish more consistent and comprehensible standards in a European framework by:

a. codifying 14 directives into a single unified text, promoting the consistency of the information that insurers have to provide;

b. contributing to the establishment, at European level, of a common culture of risk management at the heart of insurance undertakings; and

3. contribute to the modernisation of the European insurance sector and to its competitiveness.

UK: Berkshire Hathaway buys Scottish Lion

Mon, 10 May 2010 08:38:00 GMT

Scottish Lion Insurance Company (Scottish Lion) has been sold to Berkshire Hathaway, effectively ending the outstanding issues related to its proposed Scheme of Arrangement. Berkshire Hathaway appears likely to remain in for the long run, whether as insurer, reinsurer or cedent.

Previously the proposed Scheme ran into difficulties in the Scottish Courts when it was opposed by a group of American policyholders. The Scottish judge at first instance held that:

(i) it was open to the court to go behind the report of the chairman of the meeting on the voting, and to review the valuation of the votes cast. Depending on the outcome of the court's review, this might cast doubt on whether the requisite majority of 75% in value had in fact been obtained; and

(ii) it was not open to a solvent company to propose a Scheme of Arrangement, in the face of any opposition, in the absence of a problem requiring solution which (if unresolved) would spoil matters for everybody, unless it could demonstrate to the court advantages for the creditors, and that in those circumstances creditor democracy should not prevail.

That latter ruling was reversed by the Scottish Court of Appeal which remitted the matter back to the first instance court for a full sanction hearing, where fairness would be one of the major issues. The company was by no means certain to succeed at the sanction hearing, however the sale to Berkshire Hathaway mean these legal issues will remain unresolved.

Chinese Drywall – Louisiana Legislature Moves Toward Banning Policy Cancellations and Non-Renewals Based upon Drywall Claims

Mon, 10 May 2010 08:30:00 GMT

A Louisiana state Senate Bill, SB 595, would ban insurers from canceling homeowners and commercial property coverage because of Chinese drywall claims. Sponsored by State Senator Julie Quinn (R-Metairie), the bill unanimously passed the Louisiana Senate on April 26, 2010. The bill now goes to the Louisiana House Insurance Committee for consideration. Senator Quinn said she is “cautiously optimistic” that the legislation will be passed by the Louisiana House.

For more information see here.

Chinese Drywall – HUD and CPSC Issue Guidance on Remediation of Chinese Drywall

Mon, 10 May 2010 08:23:00 GMT

On Friday April 2, 2010, the U.S. Department of Housing and Urban Development (HUD) and the U.S. Consumer Product Safety Commission (CPSC) issued “interim remediation guidance” to homeowners impacted by Chinese manufactured drywall. The two Federal agencies are advising homeowners that “problem drywall” should be removed and replaced along with other components the drywall may have corroded.

The agencies relate that completed studies show a connection between certain Chinese manufactured drywall and corrosion in homes. CPSC continues to study potential long term health and safety implications.

CPSC has released a staff report on preliminary data from a study by Lawrence Berkeley National Laboratory that measured chemical emissions from samples of drywall obtained for CPSC as part of the federal investigation. The hydrogen sulfide emission rates of certain Chinese drywall samples were 100 times greater than the rates of drywall samples, which were not produced in China.. Hydrogen sulfide is a potentially corrosive gas that has been suspected of causing the corrosion associated with Chinese drywall. According to the interim guidance, the patterns of reactive sulfur compounds emitted from drywall samples show a clear distinction between the certain Chinese drywall samples manufactured in 2005/2006 and non-Chinese drywall samples.

“Our investigations now show a clear path forward,” said CPSC Chairman Inez Tenenbaum. “We have shared with affected families that hydrogen sulfide is causing the corrosion. Based on the scientific work to date, removing the problem drywall is the best solution currently available to homeowners. Our scientific investigation now provides a strong foundation for Congress as they consider their policy options and explore relief for affected homeowners.”

The HUD/CPSC interim guidance can be found here.

The Lawrence Berkeley National Laboratory report can be found here.

Washington New Credit Card Data Breach Liability Law

Fri, 07 May 2010 13:42:00 GMT

Washington Governor Christine Gregoire recently signed HB 1149 into law. Under HB 1149, if a person or entity that meets the definition of a “processor” or “business” that fails to take reasonable steps to guard against unauthorized access to credit or debit card account information that is in its possession, and such failure is found to be the proximate cause of a breach, the processor or business is liable to the financial institution for reimbursement of reasonable actual costs related to the reissuance of credit or debit cards, even if the financial institution has not suffered an injury as a result of the breach.

The processor or business may also be liable to the financial institution for attorneys’ fees and costs incurred in connection with any legal action. In addition, vendors of card processing software and equipment may be held liable for the damages incurred by a financial institution if the vendor’s negligence was the proximate cause of such damages.

For this purpose, a “processor” is defined as an individual, partnership, corporation, association, organization, government entity, or any other legal or commercial entity, other than a business as defined below, that directly processes or transmits account information for or on behalf of another person as part of a payment processing service.

A “business” is defined, for this purpose, as an individual, partnership, corporation, association, organization, government entity, or any other legal or commercial entity that processes more than six million credit and debit card transactions annually, and who provides, offers, or sells goods or services to persons who are residents of Washington.

Under HB 1149, a “vendor” means an individual, partnership, corporation, association, organization, government entity, or any other legal or commercial entity that manufactures and sells software or equipment that is designed to process, transmit, or store account information or that maintains account information that it does not own.

The new law provides for several exemptions. Processors, businesses and vendors that are compliant with PCI Data Security Standards at the time of the breach are not liable to financial institutions. They are considered to be compliant if their PCI data security compliance was validated by an annual assessment, and if the assessment took place no more than one year prior to the date of the breach. In addition, processors, businesses and vendors are not liable if the breach involved encrypted card information.

The new law goes into effect on July 1, 2010.

Click here to view the full law.

California Proposes Amendment to Data Breach Notification Law

Fri, 07 May 2010 13:36:00 GMT

The California State Senate approved Senate Bill 1166 on April 15, 2010. The bill amends sections 1798.29 and 1798.82 of the California Civil Code, which require state agencies and businesses to notify California residents of a data breach, by adding specific content requirements for such notices.

The bill requires notification to affected individuals to be written in plain language and include, at a minimum, the following information:

Name and contact information of the reporting person or business;
A list of types of personal information that were or are reasonably believed to have been the subject of a breach;
If the information is possible to determine at the time the notice is provided, any of the following: (i) date of the breach; (ii) estimated date of the breach; or (iii) the date range within which the breach occurred;
Whether notification was delayed due to law enforcement investigation;
A general description of the breach incident, if this information is available at the time of notice; and
Toll-free telephone numbers and addresses of major credit reporting agencies if breach exposed Social Security numbers or a driver’s license or California identification card number.

At the discretion of the agency or business, the following information may also be included in the notices to affected individuals:

Information about what has been done to protect affected individuals; and
Advice on steps affected individuals may take to protect themselves.

The amendment would also require agencies and businesses to electronically submit a sample copy of the notification to affected individuals to the California Attorney General if the breach affected more than 500 individuals.

The bill now moves to the California State Assembly for consideration. We will provide an update on any new developments.

Click here to view the entire bill.

California Issues Notice to Education Providers regarding New Life Settlement Training Requirements for Brokers

Fri, 07 May 2010 10:58:00 GMT

The California Department of Insurance (the “DOI”) issued a notice (the “Notice”) to education providers on April 1, 2010, setting forth the new education requirements for life settlement brokers. The Notice comes in response to California Senate Bill 98 (“SB 98”), signed into law on October 11, 2009, which repealed existing viatical settlement statutes and enacted life settlement statutes. See our October 19, 2009 blog posting for a description of SB 98.

The new life settlement statutes provide, among other things, that individuals acting as life settlement brokers who have been licensed as life agents for more that 1 year must notify the DOI within 10 days of their first life settlement transaction following July 1, 2010. The DOI is currently developing the notification form that will be submitted through its website along with a notification fee of $136 .00. The notification is required to be renewed every two years at the same time as the individual’s life license.

In addition to the notification requirement, individuals who intend to transact life settlements and have been life agent licensed for less than 1 year must obtain a license as a life settlement broker. They must complete an application, pay the appropriate fees and complete 15 hours of continuing education related to life settlements prior to acting as a life settlement broker. Click here for an outline of the 15 hour training requirement.

Furthermore, SB 98 directed the Insurance Commissioner to review the existing licensing examination requirements for life agents. The review resulted in the addition of a number of life settlement related questions to the licensing examination. The Notice indicates that pre-licensing education courses will need to be updated to include the topics covered by these additional questions.

The education and notice requirements take effect on July 1, 2010.

To date, no regulations have been adopted under SB 98. We will continue to monitor this topic.

UK: ATE Insurance

Fri, 07 May 2010 10:31:00 GMT

In Parker v Seixo [2010] EWHC 90162 (costs), which concerned the legal costs of a road traffic accident claim, the Court found that it should not consider the reasonableness of an After-The-Event insurance policy premium where the underwriter was better placed to rate the financial risk faced by the insurer and where there was no expert evidence to suggest that the ATE premium was unreasonable.

New York Insurance Department’s Proposed Circular Letter Re: the Federal Mental Health Parity and Addiction Equity Act of 2008

Thu, 06 May 2010 13:03:00 GMT

On April 26, 2010, the New York Insurance Department (the “NYID”) proposed a circular letter to provide additional guidance to insurers on the impact of the federal Mental Health Parity and Addiction Equity Act of 2008 (the “Act”). This proposed circular letter is a supplement to Circular Letter No. 20 (2009), and addresses interim final rules issued subsequent to Circular Letter No. 20 (2009) by the United States Department of the Treasury, Department of Labor and Department of Health and Human Services. In particular, the proposed circular letter discusses:

Inpatient substance use disorder benefits
Financial requirements: primary care copayment vs. specialty care copayment
Utilization reviews under Articles 49 of the Insurance and Public Health laws
Policy form and rate submissions

The proposed circular letter is addressed to all insurers authorized to write Accident and Health insurance in New York State, Article 43 corporations, and health maintenance organizations. The NYID invites comment from these insurers until May 10, 2010. If you would like EAPD to assist you with preparing and submitting comments, please click the “Email the Editor” button and provide your contact information for follow-up by an EAPD attorney.

To see a copy of the Act, click here.

To see the proposed circular letter, click here.

To see Circular Letter No. 20 (2009), click here.

FINRA Issues Due Diligence Reminder

Thu, 06 May 2010 12:56:00 GMT

On April 20, 2010, the Financial Industry Regulatory Authority (FINRA) issued Regulatory Notice 10-22 reminding broker-dealers of their obligation to conduct reasonable due diligence investigations of issuers in PIPEs and other private placements. The Notice also reminded broker-dealers of their obligation to analyze whether an investment is suitable for particular investors.

To read more, please click here.

Last Call: Join More than 40 Reinsurance Professionals at ReMedi's Mediation Conference in NYC on May 12

Thu, 06 May 2010 12:48:00 GMT

More than 40 mediators, attorneys and company representatives have registered for Re/Insurance Mediation Institute's (ReMedi) Inaugural Mediation Conference. You can earn 4.5 hours of CLE for $100 if you join them for ReMedi's Spring Conference, Insurance and Reinsurance Mediation in the 21st Century, on Wednesday, May 12 at Edwards Angell Palmer & Dodge's New York office.

The half-day conference (which has been approved by the New York CLE Board for 4.5 hours of CLE credits) will offer presentations by three distinguished panels of accomplished mediators, arbitrators and practitioners in the area of insurance and reinsurance dispute resolution. The session will address the relevance of mediation to insurance and reinsurance disputes, discuss successful mediation strategies and tactics and review key legal issues. A networking session with refreshments will follow the presentations. Registration is only $100 for those who are not members of ReMedi.

For more information about the Spring Conference, registration information and a list of participants, click here.

HK: Insurance Industry Update

Thu, 06 May 2010 09:01:00 GMT

PICC Property and Casualty Company (PICC), China's largest non-life insurer, reported an increase in profits to 1.78 billion yuan (US$260.8 million) as a result of a surge in China's stock market lifting the value of their investments and growth in insurance premiums received. PICC is exploring a number of ways to improve its solvency ratio, which currently sits at 111% having dropped 34% last year. China's insurance regulator, the Chinese Insurance Regulatory Commission, can order insurers with a solvency ratio between 100% and 150% to come up with plans to raise capital. Those insurers with a solvency ratio below 100% are subject to various business restrictions, investment curbs and suspension of dividends. As a result, PICC is seeking to sell more subordinated bonds this year following the success of raising capital by selling such bonds in 2009.

Prudential Plc had its Hong Kong share offering plan reviewed by stock exchange officials on 21 April 2010. Prudential Plc does not plan to sell new shares as part of the listing, however, the process is unique and potentially complicated. Prudential Plc's listing is key to its US$21 billion rights offering, a share sale that is essential for it to pay for its acquisition of AIA. The Hong Kong Economic Times reported that Prudential Plc may list its shares in Hong Kong in early May.

EAPD Launches Latin American (Re)insurance Regulatory Update Service

Wed, 05 May 2010 15:34:00 GMT

In speaking with our insurance and reinsurance clients, one frustration that has been consistently mentioned is the difficulty of effectively monitoring legal and regulatory developments in the various countries in Latin America. We have therefore recently launched a Latin American (re)insurance regulatory service to assist companies in overcoming this hurdle in a cost-efficient manner. The service would entitle a company to receive four issues per year of the update, each issue to be delivered by the 15th of the month following the close of quarter; receive immediate electronic alerts concerning particularly significant legal or regulatory changes impacting the business of international insurers, reinsurers and (re)insurance intermediaries in any of the 19 Latin American jurisdictions covered; and provide input to EAPD as to topics of particular significance to your company that you would like monitored and reported upon in the update and alerts. Furthermore, EAPD attorneys (and our local counsel) would of course be available to assist you with any further questions, inquiries and/or necessary follow-up on any issues posed by the developments discussed in the quarterly update and real-time alerts.

To view a complimentary, introductory copy of a quarterly update, please click here.

For further information on the Latin American (re)insurance regulatory service, please contact Machua Millett at mmillett@eapdlaw.com or (617) 239-0764.

UK FSA Consults on New Powers Under the Financial Services Act 2010

Wed, 05 May 2010 14:02:00 GMT

We reported recently on the passing of the Financial Services Act 2010 (you can see our post by clicking here) which granted the Financial Services Authority (FSA) new powers in a number of areas including reporting and control of short selling. On 26 April 2010, the FSA published a consultation paper (CP10/11) on the use of those powers, focusing on:

short selling rules: the FSA will modify slightly the scope of the existing disclosure regime in relation to rights issues, but retain the same scope for financial sector companies; the disclosure obligations will be transferred to a new Financial Stability and Market Confidence sourcebook in the FSA Handbook (FINMAR).
enforcement powers: the FSA has set out a statement of its policy on use of its new powers of suspension or restriction of authorised and approved persons, the imposition of penalties for carrying our a controlled function without approval and the imposition of penalties for a breach of the short selling rules.
financial stability information gathering: the FSA has set the scope and expected use of the power, which will also be contained in FINMAR.
compensation amendments: dealing with circumstances where the Financial Services Compensation Scheme (FSCS) acts on behalf of other compensation schemes.

The consultation is open until 25 June 2010 and the consultation paper can be found by clicking here.

Supreme Court Upholds Gartenberg Test for Mutual Funds’ Compensation of Investment Advisers

Wed, 05 May 2010 10:04:00 GMT

The Supreme Court recently issued an important decision regarding the test for determining whether an investment adviser has violated its “fiduciary duty” to a mutual fund by charging excessive fees under §36(b) of the Investment Company Act of 1940. Jones v. Harris Associates L.P., 559 U.S. --- (Mar. 30, 2010). The Court upheld the test adopted by the Second Circuit 25 years ago in Gartenberg v. Merrill Lynch Asset Management, Inc., 694 F.2d 923 (2d Cir. 1982). Specifically: “To face liability under § 36(b), an investment adviser must charge a fee that is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm’s-length bargaining.”

In Harris Associates, shareholders in a mutual fund sued the fund’s investment adviser for charging fees that were “disproportionately large,” citing the Gartenberg standard. The shareholders claimed that the fees that they were charged were disproportionately higher than those charged to the investment adviser's institutional client investors for the same fund strategies, management and advisory services. As a result, the shareholders claimed that the fees violated Section 36(b). The District Court applied the Gartenberg standard but found that the fees at issue were not disproportionately larger than the fees charged to other clients and by other investment advisers.

The Seventh Circuit affirmed, but based on different reasoning. The circuit court disapproved the Gartenberg test and adopted a test that was more deferential to the determination of the mutual fund’s board of directors. In short, the Seventh Circuit had held that while an investment adviser must make “full disclosure” to the board and “play no tricks,” it is permitted to “negotiate with the fund in its own interest.” The Seventh Circuit believed that the competitive pressures of the modern mutual fund market would preclude excessive fees. Thus, according to the Seventh Circuit, the end amount of the fees should not be evaluated, only the adviser’s satisfaction of its disclosure obligation.

The Supreme Court rejected the Seventh Circuit’s disclosure-based analysis, noting that the Investment Company Act requires a reviewing court to consider “all relevant factors.” (emphasis added). According to the Supreme Court, a court should thus take into account “both procedure and substance” in its Section 36(b) analysis. Where there was some deficiency in the trustees’ approval process or the investment adviser’s disclosure, a court must take a “rigorous look” at the outcome. On the other hand, where the trustees’ process for reviewing the investment adviser’s compensation was “robust,” the outcome should be accorded “commensurate deference.” Nevertheless, the Supreme Court held that the resulting fee may still be excessive if the plaintiff can produce evidence that the fee “is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm’s-length bargaining,” per Gartenberg.

The Court cautioned, however, that Section 36(b) “does not call for judicial second-guessing of informed board decisions,” observing that courts are “not well suited” to make “precise calculations” of proper “arm’s-length” fees. In other words, a court may not supplant a fully-informed determination by the trustees in the absence of evidence that the fee “exceeds the arm’s-length range.”

Florida Amends Rating and Approval Process to Exclude Certain Commercial Lines

Tue, 04 May 2010 13:50:00 GMT

On Friday, April 30, 2010, the Florida Legislature approved S.B. 2176, which excludes the following lines of insurance from the rate filing and approval requirements in Fla. Stat. § 627.062(2)(a) and (f):

Excess or umbrella;
Surety and fidelity;
Boiler and machinery;
Errors and omissions;
Directors and officers, employment practices, and management liability;
Intellectual property and patent infringement liability;
Advertising injury and internet liability insurance;
Property risks rated under a highly protected risks rating plan;
Commercial motor vehicle insurance covering a fleet of 20 or more vehicles; and
Any other commercial lines categories or kinds of insurance or types of commercial lines risks that the Florida Office of Insurance Regulation (the “FOIR”) determines because of the existence of a competitive market, similarity to the other categories or kinds of insurance listed above, or to improve the general operational efficiency of the FOIR.

Insurers are still required to use rates that are not excessive, inadequate, or unfairly discriminatory, and S.B. 2176 requires insurers to notify the FOIR of any changes to rates for insurance and risks in the exempted commercial lines no later than 30 days after the effective date of the change.

S.B. 2176 also makes changes to the procedure for members withdrawing from an association, fund, or pool created for a public entity.

S.B. 2176 is currently awaiting signature from Florida Governor Charlie Christ.

Click here for a copy of S.B. 2176.

Homeowners’ Defense Act Approved by House Committee

Mon, 03 May 2010 13:12:00 GMT

On April 27, 2010, the Homeowners’ Defense Act of 2009, H.R. 2555 (the "Act") was passed by the House of Representatives’ Financial Services Committee by a vote of 39-26, and will head to the House floor for a full vote, although no date has yet been set. As we reported here, Representative Ron Klein (D-FL) reintroduced the Act last May. The Act would permit states to join a national catastrophe insurance pool, and would potentially reduce the cost and improve the availability of homeowners’ insurance in Florida and in other states prone to natural disasters, such as California and Kansas.

The Act proposes to create the National Catastrophe Risk Consortium, which would serve to manage a fund that states would be able to access after the state’s catastrophe fund has been depleted, thus transferring a portion of catastrophic risk. The Consortium would serve as a conduit issuer of cat bonds on behalf of participating states, but would not take actual possession of any bond proceeds.

The insurance industry’s support of the Act has been divided. The National Association of Mutual Insurance Companies (NAMIC) and the Reinsurance Association of America (RAA) have been critical of the Act, while the Independent Insurance Agents and Brokers of America (IIABA) has expressed its support.

We will continue to monitor the progress of the Act and provide updates at InsureReinsure.com.

Click here for a copy of the Act.

Healthcare News From Capitol Hill and the Department of Health and Human Services – May 3, 2010

Mon, 03 May 2010 10:51:00 GMT

The past two weeks brought several notable healthcare developments, as the Department of Health and Human Services (HHS) continued preparations for implementation of the new healthcare reform law – Public Law (PL) 111-148.

CRS OUTLINES REGULATORY PROCESS:

On April 13, the Congressional Research Service (CRS) – which serves as Congress’ research arm – issued a report reaffirming the notion that although the legislative battle on healthcare reform is over, there is still a long road ahead as federal agencies work to implement the massive new law.

Specifically, the report indicates that PL 111-148 provides federal agencies with “…substantial responsibility and authority to ‘fill in the details’ of the legislation through subsequent regulations.” In addition, CRS notes that although some regulations are will be written in 2010, “…it seems likely that other regulations will be issued for years, or even decades to come.”

For example, HHS Secretary Kathleen Sebelius must issue regulations this year to extend coverage to dependents up to age 26, though the law does not provide details as to how this must be executed. In contrast, another provision requires HHS to issue regulations establishing criteria for qualified health plans, and specifically spells out what some of those elements need to be.

NEW REPORT INDICATES COSTS MAY INCREASE:

On April 22, independent experts at the Centers for Medicare and Medicaid Services (CMS) released a report indicating that while millions more Americans would be covered under the new healthcare law, the nation’s costs would go up slightly. In addition, the report – put forth by CMS’ chief actuary – warned that those costs also have the potential to increase further because Medicare cuts envisioned in the law may be unsustainable or unrealistic.

This report raises questions about the ability of the Independent Payment Advisory Board – also created by PL 111-148 – to achieve projected savings, noting that limiting Medicare cost growth to a level below medical price inflation would be extremely challenging.

KEY SENATOR SEEKS REVIEW OF FALSE CLAIMS LAWS:

To ensure that state laws on false claims are in compliance with recent changes to the federal statute, Senate Finance Committee Ranking Member Chuck Grassley (R-IA) recently asked that HHS and the Department of Justice (DoJ) conduct a review of the matter.

In an April 28 letter, Senator Grassley stated that HHS and DoJ should review each state’s false claims laws to ensure they are in compliance recent federal changes – including changes made in the new healthcare law. In addition, the Senator indicated specific interest in the “first-to-file” bar provisions, which preclude whistleblowers from filing a lawsuit under a state FCA if a suit is already filed in another state, and asked for a review to determine whether “first-to-file” bar provisions in state laws make the state laws less effective than federal law.

In a statement on the issue, Senator Grassley stated, “This kind of effort at the state and federal level is more important than ever as Medicaid programs are expanded and face new burdens and growing fiscal challenges. Every dollar lost to fraud is one less dollar for those who depend on the program and harms the sustainability of the Medicaid program.”

NEXT STEPS:

We will continue to follow the aforementioned items and monitor HHS as implementation of the complex healthcare law moves forward, and will provide timely updates as new developments occur.

Webinar: Emerging Trends in Asbestos Litigation: US/UK/European Issues and Perspectives

Fri, 30 Apr 2010 13:13:00 GMT

The Insurance and Reinsurance Department of Edwards Angell Palmer & Dodge is holding a 60 minute complimentary webinar entitled "Emerging Trends in Asbestos Litigation: US/UK/European Issues and Perspectives" on Tuesday, May 25, 20 at 12:00 p.m. EST.

This presentation will provide you with an overview of the important issues in asbestos litigation in the US, UK and Continental Europe.

Topics to be covered include:

US Update

- Asbestos litigation
- Asbestos Bankruptcy Trust (from a defense perspective)
- Multidistrict litigation 875 ("Asbestos MDL")
- Emerging global threat for US businesses facing possible asbestos lawsuits in US Courts for asbestos-related injuries sustained in other countries
- Allocation and other reinsurance issues related to asbestos litigation and settlements.

UK Update
- Main developments in UK asbestos liability.

EU Update
- The asbestos liability problem in the EU and other countries in Continental Europe.

Please click here to register for this webinar.

Please click here for a copy of the webinar invitation.

UK: Good News for "Non-Severe" Toxic Sofa Victims

Thu, 29 Apr 2010 07:41:00 GMT

Following on from our earlier blog on the High Court ruling that Zurich did not have to pay out for toxic sofa victims on the basis of Land of Leather's subsequent administration and breach of claims control clauses, it seems that more than 1,500 other victims of those toxic sofas have been handed some good news. In one of Britain's largest consumer group litigations ever, the High Court heard that insurers for Argos, Homebase, Walmsley Furnishing and some smaller firms had admitted liability for the problems caused by an anti-fungal chemical that was used to treat the sofas whilst they were in storage in Asia. Mr Justice MacDuff was told that a claims handling agreement had been reached which provided £20 million of compensation which would be shared between the 1,500 and 2,000 "non-severe" victims.

However, a further 2,500 of the more severely injured claimants will have to return to court on 21 May 2010 in cases where liability is in dispute to learn of their entitlement to compensation.

Join the U.S. Re Under 40s for a Networking Happy Hour in Philadelphia on April 29

Wed, 28 Apr 2010 11:22:00 GMT

The U.S. Re Under 40s are hosting a happy hour on Thursday, April 29, 2010 in Center City.

For more information about the U.S. Re Under 40s and to become a member, click here to go to the Group's website.

UK: High Court Confirms Anti-Suit Injunction to Protect an English Arbitration Clause

Wed, 28 Apr 2010 08:38:00 GMT

In AES Ust-Kamenogorsk Hydropwer Plant LLP v Ust-Kamenogorsk Hydropower Plant JSC [2010] EWHC 722 (Comm) the High Court ruled that it had jurisdiction to grant declarations and continue an anti-suit injunction to protect an arbitration clause in a contract between two Kazakhstani companies, AES Ust-Kamenogorsk Hydropwer Plant LLP (AESUK) and Ust-Kamenogorsk Hydropower Plant JSC (JSC).

Pursuant to a complex series of contracts (the detail of which was not relevant to the case) JSC was effectively the owner and grantor of a 20 year concession to operate a hydroelectric plant in Kazakhstan and AESUK was the grantee and lessee of said concession. During the course of the concession, various disputes arose between the parties, principally relating to an alleged failure by AESUK to comply with requests by JSC for information regarding the value of the concession.

This resulted in JSC bringing proceedings in the Kazakhstan courts, which AESUK disputed on the grounds of the existence of an English arbitration clause in the concession agreement. AESUK was unsuccessful in its opposition to the claims in Kazakhstan and so obtained an ex parte anti-suit injunction in England. It then applied in the present proceedings for declarations that the arbitration clause was valid, that the dispute regarding the supply of information fell within the clause and that the anti-suit injunction ought to be continued pursuant to either s44 of the Arbitration Act 1996 (which gives the court powers to make orders in support of arbitrations on the application of a party or proposed party to the arbitration), or s37 of the Superior Courts Act 1981 (which gives the court general powers to grant injunctions). JSC argued, inter alia, that the English courts did not have jurisdiction to grant an injunction as it was not permissible to rely on either statute referred to above. There was, therefore, no arbitration claim which could have formed the basis of an application to serve an arbitration claim form out of the jurisdiction under CPR 62 and the claim did not fall within any of the jurisdictional "gateways" in CPR 62.5.

Mr Justice Burton held that AESUK could not rely on s44 Arbitration Act 1996 and could not, therefore, rely on the jurisdictional gateway contained in CPR 62.5(1)(b). Section 44 could only apply if there were actual or intended arbitration proceedings, which there were not in the present case, as AESUK did not intend to commence any proceedings, it merely wished to ensure that any proceedings brought against it would be brought by way of arbitration in England. However, s37 Superior Courts Act 1981 was wider than s44, and there was no reason why it could not be relied upon. It was not necessary for an application under s37 to be parasitic on a separate cause of action; the cause of action in this case was simply the enforcement of the arbitration clause. The gateway in CPR 62.5(1)(c) could therefore be used, even where there was no actual or intended arbitration proceedings, provided that the claimant in question was relying on a contractual right not be sued in a foreign country. The anti-suit injunction was therefore upheld. Burton J was careful to point out, however, that care should always be taken not to oust the arbitral jurisdiction in circumstances such as these.

Burton J went on to hold that any dispute as to the jurisdiction of the arbitrators over the claim or the applicability of the arbitration clause could be properly dealt with by the arbitrators in any future arbitration between the parties.

This case shows that it will not always be necessary for a party to have commenced arbitration proceedings before it turns to the English courts for declaratory or injunctive relief. However, it is likely this will only apply where the party seeking the anti-suit injunction is the defendant in the proposed action, and is not seeking to commence an arbitration, but is simply seeking to ensure that any action against it is taken in arbitration in England rather than elsewhere.

California Appeals Court Holds That Insurer Can Rely on Voluntary-Parting Exclusion to Deny Coverage to Jewelry Owner who Mistakenly Gave Away $1.5 Million in Jewels

Wed, 28 Apr 2010 08:27:00 GMT

A California appeals court has ruled that an insurance company did not act in bad faith when it refused to reimburse a jewelry wholesaler for more than $1.5 million in property that the wholesaler claimed was mistakenly handed over to an individual who was merely posing as an armored-car agent. PNS Jewelry Inc. v. Penn-America Insurance Co., No. B212348 (Cal. Ct. App., 2d Dist., Mar. 1, 2010).

The decision of the 2nd District Court of Appeal, which affirmed the judgment of the California trial court, resulted from the following set of facts. Wholesale jeweler PNS Jewelry Inc. was insured by Penn-America Insurance Co. through a commercial property and liability policy. During the policy period, a PNS owner allegedly gave $1.5 million in jewelry to an individual pretending to be an employee of an armored car service that was hired to transport jewelry items to an out-of-state location. The jewelry was never recovered.

PNS subsequently sought coverage under its Penn-America policy. The insurer denied the claim, citing a voluntary-parting exclusion, which bars coverage when an insured voluntarily parts with property “if induced to do so by any fraudulent scheme, trick, device or false pretense.” PNS sued its insurer in the Los Angeles County Superior Court for breach of contract and bad faith, and both parties moved for summary judgment. The court granted summary judgment to the insurer.

PNS appealed, arguing that the provision cannot be enforced because it is “inconspicuous and unclear.” The Court of Appeal disagreed, finding that such exclusions are not uncommon and that PNS had a policy with another insurer that had an “almost identical” provision. Furthermore, the Court of Appeal determined the exclusion was conspicuous because it: (1) was listed under a bolded “exclusions” heading; (2) was not “buried” in a portion of the policy that contained unrelated material; and (3) used the same size font as the policy's other forms and endorsements.

The Court of Appeal also found that the language in the exclusion was plain and clear and not subject to another interpretation. The Court explained that by its plain terms, the voluntary parting exclusion excludes from coverage instances when the insured is tricked into parting with covered property. The word “voluntary” applies to the insured's “parting” with the property – i.e., when the insured purposely parts with the property without force. The Court further noted that although the owner of PNS was tricked into handing over jewelry because an individual was impersonating an expected courier, the owner nonetheless physically and purposely handed over the property. Therefore, the Court found that the policy plainly and clearly excluded such causes of loss.

A copy of the decision is available here.

Federal Judge Rules That Professional Liability Insurer Must Defend Insurance Broker Against Ponzi Scheme Lawsuits

Wed, 28 Apr 2010 08:18:00 GMT

The U.S. District Court for the Southern District of Texas recently ruled that a professional liability insurer must defend its insured, an insurance brokerage and consulting firm, against claims by victims of the alleged Stanford Financial (“Stanford”) Ponzi scheme. Endurance American Specialty Ins. Co. v. Brown, Miclette & Britt, Inc., et al., Civ. no. H-09-2307 (S.D. Tex. Jan. 4, 2010).

The insured provided Stanford’s bank, Stanford International Bank, with letters attesting to the Stanford’s insurance coverage, which the victims allege were false. The victims sued the firm and an individual broker for securities fraud and negligence. The victims based their securities fraud claim on the theory that by issuing the letters, the firm “crossed the line from being mere insurance brokers for Stanford Financial Group, and essentially acted as Stanford Financial’s sales agent.”

In the coverage suit, the insurer argued that the victims’ lawsuit was excluded under the policy’s exclusion for securities violations. The court held that the insurer had a duty to defend because of the negligence claim. The court distinguished contrary cases in which the excluded and covered claims were inseparable. The court found that in this case, the underlying factfinder could find that the firm’s conduct did not “cross the line from being mere insurance brokers” but did constitute negligence. The court also held that the individual broker was an “insured” under the policy, because his alleged concealment of his role as director of Stanford was committed as an employee of the insured firm.

A copy of the decision is available here.

Federal Court Finds Trademark Infringement Not “In The Course Of Advertising”, Not Covered

Wed, 28 Apr 2010 08:08:00 GMT

A federal judge in Virginia recently held that an insurer had no duty to defend its insured in a suit alleging trademark infringement, because the alleged infringement was not committed “in the course of advertising.” Premier Pet Prods., LLC v. Travelers Prop. Cas. Co. of Am., No. 3:09cv293 (E.D. Va. Jan. 5, 2010).

The insured manufactured and sold dog training collars under the names “Gentle Spray Bark Citronella Anti-Bark Collar” and “Gentle Leader Spray Sense Anti-Bark Collar.” The seller of another pet product bearing the trademarked name, “GENTLE SPRAY,” sued the insured for trademark infringement.

The insurance policy at issue provided coverage for “advertising injury” – defined as “infringement of copyright, title or slogan” – committed “in the course of advertising” the insured’s products. The insurer denied coverage, arguing that this language did not cover the trademark infringement claims. In the ensuing coverage suit, the U.S. District Court for the Eastern District of Virginia granted summary judgment to the insurer. Declining to address whether the underlying suit alleged “title” infringement, the court held that the alleged infringement was not committed “in the course of advertising.” The court found that, while the underlying plaintiff did seek an injunction to correct the insured’s advertising, the “gravamen” of the suit was the “use” and “sale” of the products bearing the allegedly infringing mark. The court noted that “in order to establish coverage under an insurance policy, the plaintiff’s advertising activities must cause the injury alleged, not merely expose it.”

A copy of the opinion is available here.

$520 Million Settlement Expected in AstraZeneca Off-Label Marketing Case

Tue, 27 Apr 2010 15:08:00 GMT

The Unites States Department of Justice is expected to announce shortly a settlement with AstraZeneca plc over allegations that the drug manufacturer improperly promoted off-label uses of its antipsychotic drug, Seroquel. Federal and state authorities have been investigating allegations that AstraZeneca promoted the use of Seroquel for purposes not approved by the Food and Drug Administration. The company has also faced allegations that it promoted favorable research while not disclosing studies linking Seroquel to an increased risk of diabetes.

If finalized, the settlement will make AstraZeneca the latest in a series of drug manufacturers that have faced large exposures due to allegations of promoting off-label uses of drugs.

Second Circuit Allows Securities Fraud Claim Alleging Misrepresentations Regarding Nature, But Not Amount, Of Mutual Fund’s Fees

Tue, 27 Apr 2010 13:07:00 GMT

The Second Circuit recently overturned the Southern District of New York’s dismissal of a claim under § 10(b) Securities Exchange Act of 1934 relating to management fees charged to a mutual fund in Operating Local 649 Annuity Trust Fund v. Smith Barney Fund Management LLC, 595 F.3d 86 (2d Cir. 2010). The court held that even though the total amount of the fees was disclosed, the allegation that a portion of the fees were “pocketed” by the defendant was sufficient to sustain the securities fraud claim.

According to the plaintiffs (representing a class of investors in the funds), the defendant re-negotiated the funds’ contract with the previous transfer agent, First Data Investor Services Group. Under the new arrangement, the funds contracted with a subsidiary of the defendants for transfer agent services. The subsidiary, in turn, subcontracted these services to First Data, which allegedly “continued to perform the same services it had previously performed at a substantially reduced rate.” The subsidiary, meanwhile, allegedly performed “only minimal functions” – a small call center – and “pocketed” the savings obtained under the re-negotiated contract with First Data. According to plaintiffs, the defendant disclosed the existence of the contracts and the total fees paid by the funds, but not the nature of the services provided by the subsidiary or First Data. The defendant thus allegedly concealed the fact that it was providing little of value to the funds while capturing the savings obtained under the new contract with First Data.

The Second Circuit held that these alleged misrepresentations could be “material” in that they altered the “total mix of information” relevant to an investor in deciding whether to invest, under the well-established Basic v. Levinson test. Specifically, the court found that the concealed facts were material in two respects. First, the facts would have revealed to investors that they were “at the mercy of a faithless fiduciary” seeking to reap profits for itself rather than for the funds, which would have affected their decision to invest with such a fiduciary. Second, the SEC requires that management fees be disclosed and categorized, and under the alleged facts, the defendant violated these rules by categorizing the “pocketed” fees as genuine transfer agent fees. As the SEC considers categorization of fees important enough to be required, such information must be material, reasoned the court.

The Second Circuit also held that plaintiffs had adequately pled “loss causation.” The court rejected the defendant’s argument that since the total amount of the fees was in fact disclosed, the alleged misrepresentations regarding the nature of those fees could not have caused a loss. In a brief analysis, the court found that plaintiffs “alleged that the defendants’ misrepresentations proximately resulted in the regular deduction of identifiable amounts that would not have been deducted had defendants conformed their conduct to what the law required.” The defendant also argued that any losses had been repaid to the funds under a settlement with the SEC, but the court found that the record was not sufficiently developed on this point.

The court upheld dismissal of the investors’ direct claim under Section 36(b) of the Investment Company Act, however. The court held that § 36(b) does not allow for a direct claim for damages by investors, only a derivative claim on behalf of the fund.

Click here to review the decision.

Liability Insurer Seeks Declaration of No Coverage in School Laptop Monitoring Case

Tue, 27 Apr 2010 10:47:00 GMT

An insurer that issued a school district liability policy to the Lower Merion School District has filed a declaratory judgment action, seeking a ruling that a recent privacy-related civil rights lawsuit against the school district is not covered by the policy. Graphic Arts Mutual Ins. Co. v. Lower Merion School District, 2:10-cv-01707-JD (E.D. Pa.).

The underlying civil rights lawsuit is a putative class action filed on behalf of all students attending two high schools, who were issued laptop computers equipped with webcams by the school district. Robbins v. Lower Merion School District, 2:10-cv-00665-JD (E.D. Pa.). The civil rights lawsuit alleges that the school district defendants “have been spying” on the students’ activity, including through the remote activation of the webcams, whereby the school district defendants could view and capture images. It contains seven counts: violation of the Electronic Communications Protection Act, the Computer Fraud and Abuse Act, the Stored Communications Act, the Civil Rights Act, and the Pennsylvania Wiretapping and Electronic Surveillance Act; invasion of privacy under the Fourth Amendment; and common law invasion of privacy.

In its declaratory judgment action, the insurer alleges that the allegations and claims contained in the civil rights lawsuit do not fall within the definitions of “personal injury” contained in the policy’s Personal and Advertising Injury coverage section. The insurer also argues that the claims in the underlying complaint are subject to an exclusion for personal or advertising injury “caused by or at the direction of the insured with the knowledge that the act would violate the rights of another and would inflict ‘personal injury’ or ‘advertising injury.’” The insurer also relies on an exclusion for claims arising out of or relating to violations of many statutes and regulations that, among other things, prohibit or limit the collection, transmission and dissemination of material or information. Finally, the insurer argues that punitive damages are not insurable under the law of the Commonwealth of Pennsylvania.

To view a copy of the civil rights lawsuit complaint, please click here.

To view a copy of the declaratory judgment action complaint, please click here.

Connecticut Attorney General Labels Credit Rating Agencies as “Enablers of the Wrongdoing,” and Calls for Regulatory Reform to End their System of Compensation

Mon, 26 Apr 2010 13:32:00 GMT

On April 23, 2010, Connecticut Attorney General Richard Blumenthal gave written testimony during to a hearing held by the U.S. Senate’s Permanent Subcommittee on Investigations regarding the nation’s financial rating agencies. According to Attorney General Blumenthal, the three large financial rating agencies skewed their ratings of structured finance securities in order to garner more fee-based ratings business from the very same clients that were marketing those financial instruments.

This testimony follows on the heals of a lawsuits filed by the Connecticut AG’s office in March against the McGraw Hills Companies, Inc., Standard & Poor’s Financial Services LLC, and its business unit Standard & Poor’s Rating Services (collectively, “S&P”) and Moody’s Corporation and Moody’s Investors Service, Inc. (collectively, “Moody’s”), two of the major credit rating agencies, which allege that they would routinely give the highest quality credit ratings to structured finance securities they knew were very risky in order to earn large fees for rating those securities.

The suits are brought under the Connecticut Unfair Trade Practices Act. The structured finance securities in question are complex debt instruments backed by pools of residential mortgages, many of which are subprime loans to home buyers with poor credit. As mortgage defaults have risen over the past few years, these structured finance securities have lost much of their value.

As in the complaints filed in those cases, the Attorney General again alleged in his written testimony that those two rating agencies deceived investors and thus helped cause the financial meltdown of 2008. The Attorney General went as far as labeling them, “enablers of the wrongdoing that brought our nation to the brink of economic catastrophe,” by essentially providing “the best ratings money could buy.”

At the crux of the Attorney General’s case is the allegation that these rating agencies are aware that investors rely on their ratings of structured finance securities, and that they continuously tout their independence and objectivity, but in realty are neither independent nor objective in the ratings that they assign. Rather, according Attorney General Blumenthal, the rating agencies are beholden to their clients, who first pay S&P and Moody’s to favorably rate their financial instruments and then sell those financial instruments to investors.

Attorney General Blumenthal’s written testimony cited specific financial instruments that were rated as investment grade by the rating agencies and then, within months of issuance, were devalued greatly and considered toxic assets. According to the Connecticut Attorney General, without “meaningful and systematic reform, our country will be left with more of these ticking time bombs.”

Attorney General Blumenthal’s written testimony suggests such systemic reform as banning the “issuer pays” business model, as it creates a severe conflict of interest for rating agencies. According to the testimony, under the “issuer pays” system, rating agencies are incentivized to use “weaken[ed] criteria for evaluating these investments so that a high credit rating was more readily given,” in order to please large issuers of structured financial products who are repeat customers. With a higher credit rating, the issuer can charge investors a larger premium for its products.

To the extreme, the Connecticut Attorney General’s testimony alleges that this practice leads to “ratings shopping,” where raters are pitted against each other and ratings business is awarded to the rater who will give the highest rating to a specific financial security.

Health Care Legislation Imposes Tax on Annuity Income

Mon, 26 Apr 2010 13:22:00 GMT

The Health Care and Reconciliation Act (the “Act”), signed into law on March 30, 2010, imposes a tax on annuity income to help pay for the multi-billion dollar reform package set forth in both the Act and the Patient Protection and Affordable Care Act, signed into law on March 23, 2010. Specifically, the Act imposes a 3.8% Medicare contribution tax on individuals who earn more than $200,000 a year, and couples who earn more than $250,000 a year. The tax will apply to net investment income, which is defined to include gross income from interest, dividends, annuities, royalties, and rents. The tax will not apply to distributions from a qualified plan under the Internal Revenue Code. Also, with respect to annuities, the tax will only apply to annuity income, and not to the inside build-up of annuities.

The life insurance industry expressed concern over the 3.8% tax in a March 24, 2010 letter to the Senate. The letter states that the tax will hinder individual efforts to save for retirement — it will service as a “disincentive to save in a product that uniquely allows an individual to accumulate savings and to guarantee that savings can never be outlived.” The letter was signed by the National Association of Fixed Annuities, the American Council of Life Insurers, the National Association of Health Underwriters, the Insured Retirement Institute, and the National Association of Insurance and Financial Advisors.

The 3.8% tax will go into effect in 2013.

Click here for a copy of the Act.

Click here for a copy of the March 24 letter.

New York Federal Court Vacates Arbitration Award Based on Evident Partiality

Mon, 26 Apr 2010 11:26:00 GMT

Scandinavian Reinsurance Company Limited (“Scandinavian Re”) and St. Paul Fire & Marine Insurance Company, St. Paul Reinsurance Company, Ltd. and St. Paul Re (Bermuda) Ltd. (collectively “St. Paul”) entered into a retrocessional agreement under which St. Paul ceded a portion of its casualty reinsurance portfolio to Scandinavian Re. After a dispute arose concerning that agreement, St. Paul demanded arbitration. Pursuant to arbitration clause in the retrocessional agreement, each party appointed an arbitrator, who then selected a neutral umpire.

The arbitration panel ultimately rendered an award in St. Paul’s favor. Scandinavian Re moved to vacate the award on the grounds that two of the arbitrators exhibited “evident partiality” under Section 10 of the Federal Arbitration Act (“FAA”), because they had failed to disclose their simultaneous involvement in another arbitration that involved a common witness, similar disputed issues and contract terms, and a reinsurer that was St. Paul’s successor.

The court began its analysis by noting that an arbitrator has a continuing obligation to disclose to the parties any relationship that a reasonable person would deem to be material. Because the two arbitrators were simultaneously presiding over another arbitration that involved similar issues, related parties, and a common fact witness who testified on overlapping subjects, the court found that the arbitrators’ failure to disclose amounted to evident partiality under the FAA. Thus, the court granted Scandinavian Re’s motion to vacate.

Click here to review the District Court’s decision, captioned Scandinavian Reinsurance Co. v. St. Paul Fire & Marine Ins. Co., et al., 09-cv-9531 (S.D.N.Y. 2010).

New York Insurance Department Opens Its Regulations to Public Comment

Fri, 23 Apr 2010 10:19:00 GMT

Pursuant to Executive Order No. 25 from the New York State Governor’s office establishing a Regulatory Review and Reform Program, the New York State Insurance Department (the "Department") is inviting comments from regulated entities and other interested parties to identify existing regulations that impose unnecessary, burdensome or excessive costs, paperwork or other requirements. The comments must describe and quantify the particular burden and must suggest remedies that the Department can undertake to eliminate or amend regulations that are unnecessary, or otherwise unduly burdensome. Comments must be received by May 24, 2010.

Executive Order No. 25 also establishes a Review Committee that has been tasked with coordinating and overseeing the review of this reform across all New York agencies. State agencies designated from time to time as participating agencies must conduct an internal review, as well as outreach to interested parties, to identify areas for reform. Agencies must consider the cost benefit principles stated in the guide issued by the Governor’s Office of Regulatory Reform, and certain criteria contained in the State Administrative Procedure Act, Executive Order No. 20 and Executive Order No. 17.

To view Executive Order No. 25, click here.

To view the cost benefit guide, click here.

To learn more about the State Administrative Procedure Act, click here.

To view Executive Order No. 20, click here.

To view Executive Order No. 17, click here.

NAIC Adopts Revisions to Suitability in Annuity Transactions Model Regulation

Fri, 23 Apr 2010 10:04:00 GMT

On March 28, 2010, the National Association of Insurance Commissioners (“NAIC”) issued a press release announcing adoption of revisions to the existing Suitability in Annuity Transactions Model Regulation (the "Model"). The revised Model aims to strengthen consumer protections in the original Model against inappropriate and abusive annuity marketing practices by, among other things:

Expanding the type of information that must be collected in order to determine whether a product is suitable for a particular customer;
Establishing general and product-specific training requirements for producers;
Requiring principal review of producer recommendations to customers; and
Clarifying that the insurer is responsible for compliance with the Model’s requirements, even if the insurer contracts with a third party to handle suitability review.

According to industry news, it is expected that the revised Model will be adopted in all US states.

Click here for a copy of the NAIC press release.

UK: Court refuses summary judgment application on unpaid rent for unairworthy aeroplane

Fri, 23 Apr 2010 09:00:00 GMT

The High Court has refused an application for summary judgment on a claim for unpaid rent for a leased aeroplane which was not airworthy.

In ACG Acquisition XX LLC v Olympic Airlines SA (2010) (unreported), the lessor, ACG, applied for summary judgment against Olympic after the airline stopped paying rent on a Boeing 747 that it had leased for a period of five years. Olympic ceased rent payments after corroded spoiler cables meant that the plane had to be taken out of service just 14 days after it had been delivered. Further problems were also discovered and the aeroplane's certificate of airworthiness was withdrawn. Olympic counterclaimed against ACG for breach of the lease agreement and damages. It argued that the agreement was not merely for possession of an aeroplane but for ACG to supply the aircraft in an airworthy condition. ACG's breach in this respect would therefore defeat the claim for unpaid rent. ACG claimed that it had delivered the aircraft in an airworthy condition as stipulated in the lease, and that Olympic's signature on the delivery certificate was proof of its acceptance of the aeroplane which precluded Olympic from maintaining its claim.

Denying the application, Mr Justice Hamblen held that for Olympic to be precluded from maintaining its claim there would need to be clear words in the lease agreement that released ACG from liability to provide an airworthy aircraft. The lease did not expressly exclude ACG's liability in this way, and the signed acceptance was only proof that the aeroplane and documents were satisfactory. He also held that Olympic had a good arguable case that that there had been a failure of consideration, which could defeat ACG's rent claim. He added that the purpose of the lease was to give Olympic the use of a useable aircraft, not just possession of an aircraft.

International Association of Insurance Supervisors (IAIS) publishes guidance paper on insurance groups

Fri, 23 Apr 2010 08:45:00 GMT

On 12 April 2010, the IAIS published a guidance paper on the "treatment of non-regulated entities in group-wide supervision" (the Guidance), which is available here.

The Guidance aims to encourage effective international supervision of all the entities in an insurance group, particularly in light of the recent financial crisis. It discusses non-regulated holding companies and operating companies. The key risks they pose are identified as relating to:

governance
financial and reputational damage spreading from the non-regulated entities to the rest of the group
capital adequacy at group and entity level
the lack of supervisory reach over non-regulated entities.

The "indirect approach" that certain jurisdictions take to supervising non-regulated entities, including the UK and other EU jurisdictions which apply the Insurance Groups Directive, is identified as having drawbacks in terms of supervising group governance, risk management and intra-group transactions.

The key features of an effective international supervision regime are identified as:

a comprehensive group-wide supervisory approach
understanding regulated entities' exposure to non-regulated entities
assessing capital adequacy on a group-wide basis
assessing fitness of senior management on a group-wide basis
obtaining accurate information about non-regulated entities in a group
cooperating with other supervisors internationally
being flexible enough to capture emerging risks from non-regulated entities
considering risk mitigation and ring-fencing measures to protect the regulated entities in the group.

UK: High Court provides guidance on the role of the insurance broker in relation to the duty to disclose to insurers

Fri, 23 Apr 2010 08:42:00 GMT

In Nicholas G Jones v (1) Environcom Limited; (2) Environcom England Limited and MS Plc [2010] EWHC 759 (Comm), the High Court ruled that an insurance broker must satisfy himself that the duty of disclosure is fully understood by the client. It was insufficient for an insurance broker to rely on written standard form explanations which had been provided to the insured.

The insured, Environcom, had claimed under its insurance policy following a fire at the insured's recycling plant in 2007. This was not the first fire to have taken place at the insured's premises and previous fires had not been disclosed to the insurer. The claim was declined by the insurer, due to material non-disclosure.

The insured had signed and reviewed several standard form warnings and explanations which made reference to the duty of disclosure. Notwithstanding this, the Court held that the broker who had arranged the policy should have gone further to explain the duty of disclosure which the insured was bound by. The Court ruled that the broker's obligation to explain could be satisfied where there had been a specific oral or written exchange on the topic, both at the time of the original placement and any subsequent renewals.

The insurance broker must provide an explanation of the type of facts which are material in nature and therefore ought to be disclosed by the insured. On the facts, this was deemed to include potential fire risks or past fires which had occurred at the premises. The broker must also take reasonable care to elicit material facts which ought to be disclosed. Here, the broker had asked no questions relating to fire risks or past fires, which, had they been posed, would have led to adequate disclosure.

The Court noted that those seeking insurance were under an unusual obligation for a contracting party, as non-disclosure of material facts could potentially lead to harsh consequences. For this reason, it is particularly important that they are given full information on the nature of the duty to disclose.

UK: High Court Rules on the Presence of Double Insurance

Fri, 23 Apr 2010 08:40:00 GMT

In National Farmers Union Mutual Insurance Society Limited v HSBC Insurance (UK) Limited Gavin Kealey Q.C., sitting as a Deputy High Court Judge, ruled that the National Farmers Union (NFU) were not entitled to a contribution from HSBC (UK) Limited (HSBC) in relation to a payment that they had made to an insured, as this was not a case of double insurance.

The source of the dispute was a fire which broke out in October 2007, causing damage to a residential property which was in the process of being sold for £1.81m. Contracts had been exchanged, but the fire occurred before completion. The contract of sale provided that the risk of damage passed from the seller to the buyers on exchange.

Both the buyers and the seller were insured at the time of the fire. The NFU had provided buildings cover to the buyers. However, one of the policy's general conditions provided that if the loss was covered by any other insurance, the NFU would only pay their share. HSBC had provided buildings cover to the seller under a policy that also extended cover to anyone buying the sellers home. It included a condition stipulating that HSBC would not pay any claim if the loss was covered wholly or in part under any other insurance.

After the fire, the buyers claimed on their cover with the NFU and were paid £1.85m. The NFU then sought a contribution from HSBC. The NFU's case was that both it and HSBC had insured the buyers for the same loss.

It was held that this was not in fact a case of double insurance. The NFU policy covered the buyers; the only qualification being that if there was another insurer covering the same loss, the NFU would pay out on a pro rata basis. However, the existence of the NFU insurance triggered the qualification in the HSBC policy, with the result that the HSBC policy's extension did not apply.

Former Executives from WaMu Testify in Senate Hearings

Thu, 22 Apr 2010 14:56:00 GMT

On April 13, 2010, the U.S. Senate Permanent Subcommittee on Investigations (the "Senate Subcommittee") heard testimony from former executives of Washington Mutual Bank ("WaMu") in its first day of hearings titled “Wall Street and the Financial Crisis: The Role of High Risk Home Loans.” The hearings are intended to be a public examination of the roles played by high-risk mortgages, credit rating agencies, regulators, and Wall Street investment banks in the financial crisis. However, the specific focus of these hearings is on the collapse of WaMu.

Former executives from WaMu will be testifying throughout the month of April. WaMu was formerly the United States’ largest thrift, and is currently the largest bank failure in U.S. history. After reviewing millions of pages of documents and conducting over 100 interviews, the Senate Subcommittee has concluded that WaMu associates were rewarded for writing high-risk loans, and that there were indications of fraud in the completion of many loan applications.

Dating back to June 2009, the Senate Subcommittee had subpoenaed several financial institutions, including Goldman Sachs, Deutsche Bank and WaMu, seeking evidence of fraud in the subprime/credit-crisis meltdown of 2008.

The Chairman of the Senate Subcommittee, Carl Levin, emphasized that the goals of the hearings are educational, and that the Subcommittee's intention is to formulate an accurate public record of the facts to better understand what happened and to hold perpetrators publicly accountable. According to Senator Levin, the hearings are also intended to inform the legislative debate concerning financial reform and to provide a foundation for future regulatory measures.

Congressional fact finding hearings such as this one do not usually have larger legal effects in the sense that the Senate Subcommittee cannot issue binding resolutions or orders. Indeed, some critics charge that such hearings are of little value and a waste of Congressional resources. However, unless the former WaMu executives invoke their Fifth Amendment right against criminal self-incrimination in their testimony, the hearings are expected to serve -- at the very least -- as a means of identifying potential defendants for future D&O litigation relating to the bank's failure.

UPDATE: Louisiana House Passes Surplus Lines Exemption Bill

Thu, 22 Apr 2010 12:58:00 GMT

As we previously reported here, the Louisiana House of Representatives scheduled a floor debate for April 21, 2010 on House Bill 285 (the “Bill”). On April 21, 2010, the Bill was passed by a unanimous vote of 83-0. Currently, the Bill is with the Louisiana Senate’s Committee on Insurance for review before it heads to the Senate floor for a vote.

The Bill clarifies that Louisiana-eligible surplus lines insurers are exempt from rate and form filing and approval. The passage of the legislation is of particular interest to surplus lines insurers as the lack of a clear statutory exemption in Florida led to numerous lawsuits following a Florida Supreme Court ruling that surplus lines insurers were subject to form filing requirements until similar clarifying legislation enacted.

We will continue to follow the Bill and provide further updates on InsureReinsure.com.

Click here for a copy of Bill.

UK: Report following resilience benchmarking survey of the insurance sector published

Thu, 22 Apr 2010 09:52:00 GMT

The Financial Services Authority (FSA) has recently published a report setting out findings from a resilience benchmarking survey of the insurance sector. Please click here to view the report.

This survey followed previous benchmarking surveys conducted in 2005 and 2008 which were mainly targeted at banks and financial sector infrastructure providers. The report states that the FSA developed a specific survey for the insurance sector in response to requests from the insurance industry. Nineteen insurance companies took part in the survey representing approximately 40% of total net written insurance premiums in the UK.

The survey for the insurance sector was developed to provide an initial assessment of how prepared the insurance sector is for major operational disruptions (such as severe weather, a flu pandemic or a terrorist attack). The survey focused on the resilience of the insurance sector if faced with such a disruption, the speed with which it could recover and any steps necessary to improve resilience.

The report found that firms were making good preparations for dealing with disruptions but needed to work more on certain areas, such as recovery timeframes, security and risk assessments.

The report noted that firms should use the findings to review the areas highlighted and make any necessary changes to ensure they are satisfied that their internal plans and procedures are robust and their firm's resilience and recovery capability is fully consistent with the needs of their business activities.

EU/UK: Presentation by Eithne McCarthy - the new Insurance Block Exemption Regulation

Thu, 22 Apr 2010 08:31:00 GMT

Eithne McCarthy, from the Financial Services Unit of the European Commission's Competition Directorate General (DG Comp), made a presentation on the new Insurance Block Exemption Regulation (BER) to the Law Society's Competition Section on 13 April 2010. This presentation was chaired by Becket McGrath, a competition partner at EAPD and current chair of the Section.

Ms McCarthy, who led the DG Comp team on the BER project, spoke on the scope and implications of the new BER, which came into force on 1 April 2010. She also explained the process for deciding whether to renew the previous BER. Please click here to review our previous blog about the new BER.

Ms McCarthy explained how the Commission had taken a first principles approach when deciding whether and to what extent to renew the existing BER. One important factor was the extent to which an ending of the BER would lead to beneficial co-operation ceasing. This led to the ultimate decision to retain and tighten up the BER for the preparation of joint compilations, tables and studies and for co-insurance and co-reinsurance pools, while dropping the exemptions for the establishment of standard policy terms and common specifications for security devices. The effect of repealing the exemptions is that parties to potentially anticompetitive agreements or arrangements will need to self-assess whether competition rules are breached. The Commission has noted that it would, in particular, like to see better self-assessment by pools.

There was considerable interest from the audience about where the Commission now stood on its findings in the business insurance sector inquiry, which were published in 2007. Particular concerns were voiced over the Commission's findings concerning the risk of the operation of subscription markets infringing Article 101 of the Treaty on the Functioning of the European Union. Ms McCarthy explained that, while the work undertaken in the context of the BER had not revealed any new concerns on this front, the Commission's original concerns over premium alignment on subscription markets had not gone away. She confirmed that the Commission was planning a series of follow-up questionnaires on this topic in the year ahead, to assess how the market has responded to the Commission's findings. She stressed that, while the Commission would prefer to see a market solution to its concerns, it was prepared to take enforcement action if necessary. While Ms McCarthy acknowledged that the BIPAR principles were a step in the right direction on this front, it was left unclear whether they would be viewed as sufficient.

EU: Solvency II: draft technical specifications for fifth Quantitative Impact Study (QIS5) published

Wed, 21 Apr 2010 11:48:00 GMT

On 15 April 2010, the European Commission (Commission) published for consultation draft technical specifications for the QIS5 exercise.

The draft QIS5 technical specifications are based on those produced by the Committee of Insurance and Occupational Pensions Supervisors (CEIOPS) for the Commission. The Commission notes that it has taken into account the argument that the CEIOPS specifications, if adopted unchanged, would have resulted in a significant increase in capital requirements as compared to the last quantitative impact study that was undertaken (QIS4). As a result, amendments have been made to the relevant risk free rate for calculating technical provisions, the eligibility of own funds and the calibration of the standard formula Solvency Capital Requirement (SCR).

Of particular interest, at paragraph OF.30 of the draft QIS5 technical specifications, is that the proportion of Tier 1 capital items must be at least 50% of the SCR. There had been some expectation that Tier 1 capital would be required to be at least 60% of the SCR. This amendment will make Lloyd's compliance with Solvency II less onerous, since it currently holds a significant proportion of its capital as letters of credit, which are designated as Tier 2 capital.

Comments on the draft QIS5 technical specifications are being sought from selected stakeholders. The QIS5 exercise is expected to run between August and November 2010.

The draft technical specifications for QIS5 can be found at http://ec.europa.eu/internal_market/insurance/docs/solvency/qis5/draft-technical-specifications_en.pdf.

UK: High Court rules on existence of insurance policy

Wed, 21 Apr 2010 09:22:00 GMT

In Ian Hall v (1) Newall Heating Limited; (2) AGF Insurance Limited (March 2010) unreported, the court held that Mr Hall, who is suffering from mesothelioma caused by exposure to asbestos, could not identify AGF Insurance (AGF) as being liable, pursuant to the provisions of the Third Party (Rights against Insurers) Act 1930, to satisfy a default judgment obtained against Newall Heating (Newall).

Mr Hall had obtained a default judgment for damages against Newall for injury caused by exposure to asbestos while he was employed by them between 1967 and 1974. National Employers' Mutual (NEM) was identified as an insurer that may have provided cover to Newell during the relevant period and AGF accepted that it was the successor to the relevant liabilities of NEM. Ronald Walker QC, sitting as a deputy High Court judge, identified that the only issue before the court was whether Mr Hall could prove that NEM did provide employers' liability insurance to Newall.

The judge held that the following were conclusive in his finding for AGF:

no employers' liability or public liability policies could be found following a search of both paper and electronic records; and
Mr Hall's key witness, the insurance broker, while truthful was being asked to recall "mundane events which happened 40 or more years ago with scant documentation to help him"

The judge held that the decisive indicator was the absence of any record on the computer system used by the insurer.

While this case does not break new ground in terms of claims or coverage, of note was the reliance of the judge on the records of the insurer. In this case, AGF could demonstrate that all new policies written by NEM from 1980 onwards were placed on computer and that existing policies were also transferred to computer. Record management is clearly an important area for insurers when contesting claims especially those that may arise many years after the policy is written.

Chinese Drywall - Chinese president says that he will look into drywall responsibility

Wed, 21 Apr 2010 09:10:00 GMT

United States Senator Bill Nelson (D-Fla.) reports that, this week, Chinese president Hu Jintao told him this week that he would investigate problems with Chinese manufactured drywall.

“If we can get the top government official of China working on this, then that's where we're going to get the money to make these homeowners whole,” Nelson said in a news release from his office Wednesday, April 14, 2010. Nelson revealed that he had spoken with Hu about the problems on Tuesday, April 13, 2010 during a break in a nuclear security summit in Washington, D.C. Through a translator, Hu told Nelson he would “look into it.”

Senator Nelson’s news release is here.

EAPD Partner Appointed to NY Insurance Exchange Working Group

Wed, 21 Apr 2010 09:05:00 GMT

Nick Pearson, a partner in EAPD's Insurance and Reinsurance Department, has been appointed by New York Insurance Superintendent James Wrynn to serve on the New York Insurance Exchange Working Group. The Working Group will report back to the Superintendent on the feasibility of recreating the Exchange. Recreating the New York Insurance Exchange is one of the Governor's most important initiatives, as it would help reaffirm New York's status as the focal point of international trade and finance. Please reference our coverage on the New York Insurance Exchange here, or contact us directly for any questions by clicking "Email the Editor" on the left-hand navigation.

Eyjafjallajökull Volcano’s Flight Disruption Leads to Uncovered Losses and New Types of Coverage for Airlines

Tue, 20 Apr 2010 11:18:00 GMT

As the Eyjafjallajökull volcano continues to erupt and the dust cloud over much of Europe continues to hang in the air, approximately 16,000 flights each day are being canceled without any certainty as to when normal flight schedules can resume. According to various reports, the airlines, which are estimated to be losing approximately $200 million per day in lost revenues a result of the canceled flights, will not be able to recover from their insurance companies for their losses.

In order for the airlines to collect, they would need very broad business interruption policies, with wording that did not require physical damage to aircraft as a pre-requisite to cover being triggered. Therefore, while the proactive cancelation of the flights has prevented any material damage to the planes, it has also served to preclude recovery under most airlines’ business interruption policies. Similarly, claims arising from the non-delivery of air-freight shipments generally require some form of “material damage” in order for there to be coverage.

As often happens in the wake of catastrophes and disasters, the insurance industry is considering new insurance products that would provide coverage for the cancelation of flights because of future volcanic eruptions. Volcanic eruptions necessitate the cancelation of flights because of the danger of flying through a volcanic ash or dust cloud. According to JLT Aerospace, three events involving flights through volcanic ash clouds in 1982 and 1989 resulted in the failure/shutdown in the four engines of each plane, resulting in descents to lower flight levels and severe abrasion damage to the fuselage and flying surfaces. Although all three planes made safe emergency landings, their engines were beyond economic repair and/or required lengthy repairs. Although volcanic activity in Europe is not a regular event, the Eyjafjallajökull volcano is reportedly not among the ten most dangerous volcanoes in Europe.

We will continue to provide updates on this and other aviation insurance issues on www.InsureReinsure.com.

New York Seeks Comments on Draft Amendment Restricting Release Terms

Tue, 20 Apr 2010 11:13:00 GMT

The New York Insurance Department has proposed a fourteenth amendment to Regulation 64, Unfair Claims Settlement Practices and Claims Cost Control Measures (the “Proposed Amendment”). The Proposed Amendment would impose additional restrictions on releases issued in connection with settlements. These additional restrictions provide that:

Insurers may not require the execution of a release that requires the releasor to keep the terms and conditions of the settlement confidential, unless warranted by the circumstances;
Insurers may not require the execution of a release that prohibits the releasor from making true statements about the releasee that are disparaging, negative, denigrating or derogatory;
An insurer shall not require execution of a release for a claim arising under a liability insurance policy unless specified information is included in the release;
Insurers must issue separate releases for property damage claims and bodily injury claims where settlements involve both types of claims arising under liability insurance policies; and
Insurers may only use a prescribed release form for releases of motor vehicle property damage liability claims, or a form containing substantially similar language to that contained in the prescribed form.

Under the Proposed Amendment, insurers would not be subject to the additional restrictions if the claimant is a “large commercial claimant,” and if such claimant agrees in writing that the insurer shall not be subject to the additional restrictions.

Comments on the Proposed Amendment may be sent to the New York State Insurance Department on or before May 5, 2010. If you would like EAPD to assist you with preparing and submitting comments, please click the “Email the Editor” button and provide your contact information for follow-up by an EAPD attorney.

Click here to view the Proposed Amendment.

EAPD's Surplus Lines Manual Annual Update Now Available Online

Tue, 20 Apr 2010 10:31:00 GMT

EAPD is pleased to announce that its Excess and Surplus Lines Manual has been updated to reflect current legislative developments in the United States. To view, print or download the current edition of this comprehensive Manual please visit EAPD's dedicated Excess and Surplus Lines Manual website at http://surplusmanual.eapdlaw.com/. The Manual is available by state or in full through the website. If you would like a hard copy of the Manual please email SurplusLines@eapdlaw.com with your full name and address.

SEC and Senate Special Committee on Aging Intensify Inquiries on Life Settlements

Mon, 19 Apr 2010 14:35:00 GMT

The Securities and Exchange (SEC), the United States Senate Special Committee on Aging Life Settlements, among other Congressional committees, and federal and state agencies throughout the country have intensified their inquiries on life settlements and the way insurance companies are pricing premiums as a result of the life settlement securitization asset valuations. Life settlements are described as the sale of a life insurance policy to a third party in which the new owner continues to pay the premiums and receives the face value of the policy at maturity, while the original policy owner receives a lump sum cash payment.

According to the SEC, the Task Force "will consider, among other things, the application of the federal securities laws to life settlements, the emerging role of securitization, the life settlements marketplace (including trading platforms), and market intermediaries. In particular, in light of reported recent efforts to collect and securitize life settlements by some large investment banks, the Task Force will focus on investors, sales practices and intermediaries.

The SEC Chairperson - overseen closely by Congress - is moving forward quickly on the work of its internal Life Settlements Task Force (made up of senior representatives from the various divisions within the SEC), which is examining issues of concern in the life settlements market and to advise the Commission whether market practices and regulatory oversight can be improved. The Task Force is currently in the "information gathering stage" and has been meeting individually with industry participants. They are near the end of the fact-gathering stage, but may be willing to engage additional points of view from market participants.

The initial efforts will culminate in the SEC Chairman and her Counsel (who is chairing the Task Force) deciding next steps. This decision will be largely based upon congressional reaction and subsequent oversight initiatives from Chairman Kohl and Members of the U.S. Senate Special Committee on Aging, and the U.S. House Financial Services Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises. There will be "a definite outcome" to this effort, according to the SEC and Congress.

Most important that the industry understand is that Federal legislation and/or regulation is being seriously contemplated. Also believed to be focusing efforts on this issue - in addition to the SEC and congressional inquiries - include the U.S. Department of Justice and its Federal Bureau of Investigation (primarily regarding alleged fraudulent practices of brokers toward a vulnerable population), the U.S. Federal Trade Commission (regarding consumer protection generally), and certain State Attorneys General. Because of the political nature of this issue, and the competition among federal agencies and between the federal and state governments to act quickly on such political issues involving large markets, it is likely that the ongoing scrutiny will increase in the coming months.

The ReMedi Spring Conference: Insurance and Reinsurance Mediation in the 21st Century

Mon, 19 Apr 2010 10:27:00 GMT

The ReMedi Spring Conference: Insurance and Reinsurance Mediation in the 21st Century will take place on Wednesday, May 12, 2010 from 1:00 p.m. – 5:15 p.m. at Edwards Angell Palmer & Dodge, LLP, 750 Lexington Avenue, New York, NY. There will be presentations by three panels of mediators, arbitrators and practitioners experienced in insurance and reinsurance dispute resolution on the relevance of mediation to insurance and reinsurance disputes, successful mediation strategies and tactics, and other key legal issues. A networking session with refreshments will follow the presentations. This presentation is eligible for 4.5 CLE Credits by the NY CLE Board. To sign up for the conference and obtain a discounted membership fee (on or before April 28, 2010) to join ReMedi, click here to register on-line and pay by credit card. (Please find 'Use your credit card or bank account." link at the bottom of the PayPal page and fill in required information.) If you cannot make the Conference but wish to join ReMedi, click here.

Hedge Funds Back Down in Argentina Claim After Asset Freeze Fails

Mon, 19 Apr 2010 09:47:00 GMT

Hedge funds seeking to recover more than $554 million in judgments against Argentina have reportedly withdrawn court appeals to stop assets being taken out of accounts at Citibank, diminishing their chances of ultimate success.

A US judge had placed a temporary freeze on billions of dollars of assets held at Citibank's Argentina unit but in March Argentina succeeded in overturning that order. The securities accounts were being pursued by hedge funds, including Aurelius Capital Partners and Blue Angel Capital, that have final judgments against the republic arising from its default on bonds in 2001. The funds had argued that the accounts held by Argentina's state retirement agency Administracion Nacional de Seguridad Social should be treated as US property and frozen in order to satisfy the country's judgment debts.

The funds reportedly told the Second Circuit that their claim would be "fruitless" if the order freezing the assets did not remain in place.

Argentina defaulted on billions of dollars' worth of bonds during a financial meltdown in 2001.

New York Seeks Comments on Draft Regulation Prohibiting Use of Discretionary Clauses in Life and Health Insurance Policies

Mon, 19 Apr 2010 09:36:00 GMT

The New York Insurance Department has issued a proposed regulation that would prohibit life and health insurers from issuing policies that contain discretionary clauses (the “Proposed Regulation”). The Proposed Regulation defines “discretionary clause” to mean a provision in a policy form that:

Grants an insurer, plan administrator or claims administrator the discretionary authority to determine eligibility for benefits, resolve disputes, or interpret terms and provisions; or
Reserves a right to an insurer, plan administrator or claims administrator to develop standards of interpretation or review.

Under the Proposed Regulation, inclusion of such a discretionary clause in violation of these provisions would be deemed an unfair method of competition or an unfair or deceptive act and practice in the conduct of the business of insurance.

The stated purpose of the Proposed Regulation is to permit courts to review policy provisions de novo, where discretionary provisions limit courts to reviewing whether insurer decisions or interpretations are arbitrary and capricious.

Comments on the Proposed Regulation may be sent to the New York State Insurance Department on or before May 5, 2010. If you would like EAPD to assist you with preparing and submitting comments, please click the “Email the Editor” button and provide your contact information for follow-up by an EAPD attorney.

Click here to view the Proposed Regulation.

Louisiana: Surplus Lines Exemption Bill Scheduled for Floor Debate

Mon, 19 Apr 2010 08:42:00 GMT

The Louisiana House of Representatives has scheduled a floor debate for April 21, 2010 on House Bill 285 (the “Bill”). The Bill clarifies that Louisiana-eligible surplus lines insurers are exempt from rate and form filing and approval requirements. Passage of the Bill is of particular interest to surplus lines insurers as the lack of a clear statutory exemption in Florida led to numerous lawsuits following a Florida Supreme Court ruling in Essex Ins. Co. v. Zota, Case No. SC06-2031 (June 26, 2008), that surplus lines insurers were subject to form filing requirements. As we reported here, similar clarifying legislation was passed almost a year later.

We will continue to follow the Bill and provide further updates on InsureReinsure.com.

Click here for a copy of Bill.

Last Week in DC: News From Capitol Hill and the Department of Health and Human Services - April 19, 2010

Mon, 19 Apr 2010 08:38:00 GMT

After weeks of uncertainty, Congress finally cleared a federal program extension bill last week that will prevent Medicare physician payment cuts. Down the road at the Department of Health and Human Services (HHS), agency officials prepared to begin the arduous task of implementing various provisions of the new healthcare reform law.

CONGRESS COMPLETES ACTION ON MEDICARE PHYSICIAN PAY:

Ending weeks of back and forth debate, the House and Senate last week approved a final package of short-term extensions of several federal programs that had recently lapsed, such as unemployment benefits. In addition, the legislation – H.R. 4851 – includes a temporary reprieve for physicians from Medicare reimbursement reductions. Originally written to extend the reprieve until only April 30, the legislation approved by Congress now includes an extension to May 31 – at which time lawmakers will need to revisit the issue with a longer-term solution.

Shortly after final passage in the House on Thursday evening, President Obama signed the measure into law.

HHS REPORTS ON HOSPITAL INFECTION RATES:

Meanwhile, HHS released a new report last Tuesday that details potentially troubling findings on infections that patients acquire while in hospitals, warning that such infections are increasing nationwide. In a conference call with reporters, HHS Secretary Kathleen Sebelius categorized the problem as “incredibly serious,” stating that up to 100,000 deaths are related to hospital-acquired infections each year.

This report allows lawmakers to draw attention to provisions in the new healthcare law (Public Law 111-148) that will begin to address this growing problem in the coming years.

Language in the new law states that, beginning in 2014, hospitals in the top 25th percentile of rates of infections acquired in hospitals for high-cost and common conditions will be subject to a penalty in their Medicare reimbursements. In addition, the language requires the HHS Secretary to submit a report to Congress in 2012 on the appropriateness of establishing a similar policy relating to other Medicare providers, such as nursing homes, ambulatory surgery centers, health clinics and inpatient rehabilitation facilities.

NEXT STEPS:

We continue to closely monitor HHS and other relevant federal agencies as implementation of the complex healthcare law begins in earnest, and will provide timely updates as notable developments occur.

Update: National Flood Insurance Program Extended to May 31, 2010

Mon, 19 Apr 2010 08:15:00 GMT

As we previously reported here, last week the U.S. Senate failed to reinstate the National Flood Insurance Program (“NFIP”). In a later vote, however, the Senate passed the Continuing Extension Act of 2010 (the “Act”) by a vote of 60 to 40. As previously reported, the Act also includes extensions of unemployment benefits and COBRA health care insurance benefits.

After the Senate passed the Act, it was returned to the House for a new vote because the Act was amended by the Senate to extend the expiration dates for the various programs from the end of April to the end of May. The Act passed in the House by a 289-112 vote. President Obama signed the Act into law shortly thereafter. The reinstatement of the NFIP is retroactive to March 28, 2010 and authorizes the NFIP through May 31, 2010.

Although industry groups are happy with the reinstatement of the NFIP, they remain frustrated by the short-term extensions as such extensions cause uncertainty in the market. Charles Symington, the senior vice president of government affairs of The Independent Insurance Agents & Brokers of America, stated: “Though we are grateful that Congress extended this program, we are increasingly frustrated by these repeated one-month extensions and the periods of expiration that sometimes result from them.” David A. Sampson, president and CEO of the Property Casualty Insurers Association of America (PCI), stated: “We are pleased that Congress made this a priority upon returning from recess this week…But these short putts down a long fairway set a dangerous precedent that leaves homeowners vulnerable. We need a long-term, sustainable solution to the flood program.”

The American Workers, State, and Business Relief Act of 2010, H.R. 4213, which would extend the NFIP and other programs through Dec. 31, 2010, is currently waiting on conference between senators and representatives to work out differences in the House and Senate versions of the bill.

We will continue to monitor NFIP-related developments and provide updates at InsureReinsure.com.

UK: Proposals for compensating EL claimants

Fri, 16 Apr 2010 08:24:00 GMT

On 1 April 2010 the ABI held a seminar for liability carriers on developments in relation to EL, covering two main topics, the ELTO (Employers' Liability Tracing Office) and a possible scheme for compensating those with EL claims.

There is at present a voluntary scheme, the Tracing Code, which has helped some 20,000 claimants but it is voluntary and not comprehensive, applies only to post-1999 policies and the results are considered disappointing.

Accordingly an ELTO has been set up which will be run by Tracing Services Limited, a subsidiary of the Motor Insurers' Bureau. It is hoped that all liability carriers, including those in run-off, will be members, although membership will be voluntary. The programme will cover current as well as old policies. The scheme is to be set up over a period of two to three years. The first stage will comprise setting up the database. The second stage will involve testing and setting up a website and at the third stage additional policy information will be added, including codes for each employer. It is intended that the scheme will be fully operational by the end of 2012. Initial submission of data, from January 2011, will be voluntary but it is likely that FSA regulations will be in place, making the supply and loading of data compulsory, by April 2011. The scheme will initially cover current policies, both new and renewed. Historic policies will be added only as and when a new claim is made, as those policies are considered to be the ones most likely to give rise to further claims.

There will be no joining fee for members of the scheme but all relevant insurers will have to pay a levy, which will be based on gross written premiums. It is likely that run-off companies will not have to pay the levy as the amounts concerned would be too small to be worth collecting from run-off companies and their contributions would in any event impact on the return to their creditors if the company is insolvent.

The second issue was compensation for those who could not trace their employers or the cover. There are issues as to whether this will cover mesothelioma alone, all diseases or both diseases and accidents. It is likely that it would cover post 1972 claims only, that being the date from which EL cover was compulsory. To encourage claimants to trace their employers, and their insurers, where possible, it is likely that the compensation scheme will pay only a proportion, probably 75%, of common law damages. A Department for Work and Pensions consultation on this scheme is currently in progress.

UK: Financial Services Act 2010

Fri, 16 Apr 2010 08:16:00 GMT

The Financial Services Act 2010 (the Act) received Royal Assent on 8 April 2010. The Act amends the Financial Services and Markets Act 2000 to address a number of issues that are perceived to have contributed to the financial services crisis, including:

creating a new financial stability objective for the Financial Services Authority (FSA)
requiring the FSA to establish a new body whose function is to enhance the understanding and knowledge of members of the public of financial matters
permitting the UK Treasury to make regulations regarding the preparation, approval and disclosure of executives' remuneration reports
obliging the FSA (in consultation with the Treasury and the Bank of England) to make rules requiring authorised firms to prepare and keep up-to-date a recovery plan and a resolution plan (dealing with circumstances in which it is likely that the business will fail)
empowering the FSA to make rules regarding short selling (we have reported previously on the FSA's short selling disclosure obligations and its ban - since lifted - on short selling - click here to see our most recent post
extending the FSA's disciplinary powers
strengthening the FSA's power to make rules requiring authorised firms to establish a consumer redress scheme

Parliament has now been dissolved in advance of the UK general election to be held on 6 May 2010. In order to pass the bill before dissolution of Parliament, the Government had to agree to drop two of its more controversial elements. The Act does not, therefore, include the following provisions which were included in the original draft bill:

establishing a Council for Financial Stability
allowing for group representative action in the courts for people with similar claims ("class actions").

A full copy of the Act can be found by clicking here (html format) or here (pdf format).

HK: Hong Kong and Guangdong sign Cooperation Agreement

Fri, 16 Apr 2010 08:11:00 GMT

The Governor of Guangdong Province, representing the Guangdong Provincial Government, and the Chief Executive of the Hong Kong Special Administrative Region (the SAR) signed a Framework Agreement on Hong Kong/Guangdong Co-operation (the Framework Agreement) at a signing ceremony in Beijing on 7 April 2010.

The Framework Agreement is valid for 10 years and its objectives include: promoting socio-economic development in the SAR and Guangdong Province to create a new "world-class economic zone"; enhancing Hong Kong's position as an international financial centre and accelerating the development of financial services industries in Guangdong Province; and facilitating the flow of people, goods and information between the SAR and Guangdong Province in order to build an international aviation, shipping and logistics hub.

To achieve this, the SAR and Guangdong Provincial Governments are to develop and implement a number of policies. The policies include:

supporting the establishment of cross-boundary subsidiaries in Guangdong Province by companies established in the SAR (in particular companies in the financial services sector);
supporting Hong Kong-invested enterprises in opening up the mainland market and implementing the Hong Kong Closer Economic Partnership Arrangement (CEPA); and
further promoting mutual legal co-operation and strengthening ties and communication with Guangdong authorities and legal bodies.

Tax Treatment of Carried Interest Could Be Revived in Senate

Fri, 16 Apr 2010 08:07:00 GMT

Though the Senate passed its Tax Extenders legislation in mid-March without including House language to change the tax treatment of the “carried interest” income of investment managers, the issue may receive a second look in the coming weeks.

Portions of the Tax Extenders legislation – which include a variety of popular tax credits and extended assistance to the unemployed – must be offset by spending cuts or tax increases elsewhere, but some of the Senate’s original offsets were instead used to pay for the final healthcare legislation that was enacted last month.

As a result, the Senate’s Tax Extenders bill now has a $30 billion hole and not many options to fill it – a predicament that appears to be increasing the likelihood that leaders may revisit the issue of changing the tax treatment of carried interest. By taxing this income at regular income rates rather than the current practice of taxing it at capital gain rates, lawmakers would be able to plug the gap and get final legislation across the finish line.

Although historically unpopular in the Senate, the possibility exists that carried interest language could be watered down (such as by delaying its implementation date), in order to make the provision acceptable to skeptical Senators.

We will continue to monitor this issue and provide updates on InsureReinsure.com.

EU: Solvency II - first Level 3 guidance published

Fri, 16 Apr 2010 08:01:00 GMT

On 31 March 2010, the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) published the first of its Level 3 guidance for Solvency II.

The Level 3 guidance, on the pre-application process for internal models, marks the start of the next stage in ensuring implementation of Solvency II by 31 October 2012 and follows swiftly after CEIOPS published its final Level 2 advice. CEIOPS' focus will now be on delivering Level 3 guidance for all areas of Solvency II.

In relation to the pre-application process for internal models, CEIOPS notes:

whilst the pre-application process is voluntary, it is beneficial both for undertakings and supervisors to have a consistent internal models pre-application process;
the pre-application stage to the approval process will assist undertakings by giving them the opportunity to liaise with their supervisor as they develop internal models; and
the information reviewed will enable supervisors to form a view on how prepared an undertaking is to submit an application.

The CEIOPS press release can be found here and the full guidance paper is here.

Connecticut Superior Court Awards Summary Judgment in Favor of Insurer on Uninsured Motorist Claim Involving Bottle-Throwing Pedestrian

Thu, 15 Apr 2010 09:57:00 GMT

The Connecticut Superior Court recently awarded summary judgment in favor of an insurer on an uninsured motorist claim involving a pedestrian who threw a bottle at the automobile driven by the plaintiff, injuring the plaintiff in the process. Gildersleeve v. Travelers Home and Marine Ins. Co., CV-08-5024259 (Conn. Super. December 29, 2009).

According to the opinion of the court, the following facts are undisputed. The Plaintiff was driving down a one way street when he encountered another vehicle stopped in the road, the driver of which was conversing with a pedestrian. The plaintiff honked the horn in his vehicle, and the unknown driver of the stopped vehicle pulled over. Then, as the plaintiff attempted to pass the other vehicle, the pedestrian threw a glass bottle toward the plaintiff’s vehicle, which broke the vehicle’s window and hit the plaintiff in the face, causing him injury.

The plaintiff made an uninsured motorist claim with the defendant insurer, who provided the plaintiff with uninsured motorist coverage. The insurer denied the claim on the basis that the plaintiff’s injuries did not arise from the operation or use of an uninsured motor vehicle as required by the insurance policy. The plaintiff then filed a lawsuit against the insurer, and the insurer moved for summary judgment.

The court granted the insurer’s motion for summary judgment. The court based its decision on the fact that “the alleged tort-feasor is not the driver of the uninsured motor vehicle and there is no evidence of a connection between the uninsured vehicle and the plaintiff’s injury.” “Further,” the court continued, “the requirements of the insurance policy in this case mandate that payments of uninsured motorist coverage be made as a result of the ‘use’ and ‘operation’ of the uninsured vehicle, not of the plaintiff’s vehicle.”

A copy of the decision is available here.

$30.3 Million Jury Award in Secondhand Asbestos Lawsuit Upheld on Appeal

Thu, 15 Apr 2010 09:42:00 GMT

We first reported on this secondhand exposure lawsuit here. In February 2008, a New Jersey jury awarded $30.3 million to the family of Mark Buttitta, who died from mesothelioma. The Buttitta family argued that he was exposed to asbestos while working summers at an auto parts warehouse and at home from asbestos fibers that clung to his father’s and brothers’ work clothes. On April 5, 2010, the Superior Court of New Jersey Appellate Division affirmed the jury's award. The decision can be obtained here.

The Appellate Division found that plaintiff presented sufficient evidence to establish that Buttitta regularly worked in close proximity to asbestos containing parts to permit the issue of causation to go to the jury. The Court found no merit in defendants' arguments that plaintiff's expert opinions were "novel and unsupported." On defendants' motion concerning remittitur of the damages awarded for loss of parental and spousal services as excessive, the Court deferred to the trial court judge in finding that while the award was in excess of plaintiff's expert calculations, the jury was entitled to find the expert was conservative in his calculations. Similarly, the Court dismissed arguments concerning jurisdiction, discovery disputes, and rulings as to summary judgment.

This decision follows a Tennessee secondhand asbestos lawsuit that we reported on here, which settled for an undisclosed amount in September 2009 following a decision in plaintiff's favor on a motion for summary judgment. These cases clearly lend support to the belief that secondhand exposure cases will represent the "second wave" of asbestos litigation as family members of those that worked in close proximity to asbestos develop asbestos-related diseases.

Update: U.S. Senate Fails to Extend National Flood Insurance Program

Thu, 15 Apr 2010 09:38:00 GMT

As we previously reported here, the Senate voted to end floor debate on a bill that includes reinstating the National Flood Insurance Program (“NFIP”) on Monday, April 12, 2010. The reauthorization provision is contained in a bill that also includes the extension of unemployment benefits and COBRA health insurance subsidies. On Wednesday, April 13, 2010, the Senate voted on the bill and was two votes short of obtaining the 60 votes necessary to pass the bill.

We will continue to monitor NFIP-related developments and provide further updates at InsureReinsure.com.

Iowa Enacts Law Requiring 30-Day Rate Hike Notice from Health Insurers

Thu, 15 Apr 2010 09:32:00 GMT

On April 9, 2010, Iowa’s governor Chet Culver signed measures (Senate File 2201) designed to create greater transparency and disclosure of health insurance premiums, and to expand the rights of consumers prior to any rate increases by insurance companies. Among some of the highlights of the bill, Senate File 2201 requires:

all state-regulated health insurance companies to immediately notify policyholders of any application for a rate increase exceeding the average annual health spending growth rate stated in the most recent national health expenditure projection published by the centers for Medicare and Medicaid services of the U.S. Department of Health and Human services;
the commissioner of the Iowa Insurance Division (“IID”) to hold public hearings at the time a carrier files for proposed health insurance rate increases exceeding the average annual health spending growth rate mentioned above, prior to approval or disapproval of the proposed rate increases;
all state-regulated health insurance companies to cover mental health and substance abuse treatment for veterans who are employed by a business with more than 50 employees or a small business covered under a contract that includes treatment of mental illness and substance abuse; and
the creation of Health Care and Insurance Cost Work Group tasked with considering ways to reduce costs of providing health insurance coverage and services, including providing an annual assessment of the impact of federal health care reform legislation on healthcare costs of the State;

Click here for a copy of Senate File 2201, and click here for the related Executive Order 23, which establishes specific steps to be taken by the executive branch to work in concert with the legislature on this reform.

The bill is particularly timely, given the recent reviews of Wellmark Blue Cross Blue Shield’s (“Wellmark”) rate increases. Wellmark notified policy holders that an 18% increase in rates was scheduled to go into effect April 1, 2010. However, the Iowa State court stayed the increase and requested that the IID hire a certified actuary independent of Wellmark to conduct a secondary review (i.e., following the review conducted by the State). On April 12, 2010, the IID posted the results of this secondary investigation by a Philadelphia firm, which found Wellmark’s proposed rate increases were justified based on anticipated lifetime loss ratios and higher incurred expenses. For more on Wellmark and the investigations, click here for a copy of the letter sent by the IID in response to the Court’s request for a secondary review.

UK: Government increases payments for mesothelioma victims under statute

Thu, 15 Apr 2010 07:57:00 GMT

Following the Government's announcement last month (as previously reported here), The Mesothelioma Lump Sum Payments (Conditions & Amounts) (Amendment) Regulation 2010 has come into force. The amendments bring the rates payable under those Regulations into line with the rates also payable to mesothelioma victims under the Pneumoconiosis etc (Workers' Compensation) Act 1979. The new rates will apply to people diagnosed with mesothelioma on or after 1 April 2010.

If you would like to review the new Regulation please click here.

International Public Company D&O: Status & Trends - Canada

Wed, 14 Apr 2010 12:13:00 GMT

Class action securities claims are a perennially interesting topic for attorneys and companies around the world and across industries. To learn more on the recent Canadian experience in class action securities claims, click here http://www.insurereinsurevideos.com/ for a video presentation by EAPD's Mary-Pat Cormier presenting her paper on International Public Company D&O: Status & Trends - Canada. Securities class action claims are new to Canada. The recent addition of provisions in certain provinces' Securities Acts has created the ability of plaintiffs to file class actions for continuous disclosure obligations in connection with publicly traded securities. These statutory changes, coupled with recent Canadian decisions interpreting these new laws, including Silver v. IMAX Corp., Green v. CIBC, and McKenna v. Gammon Gold, Inc., serve as a wake-up call for Canadian companies that trade on any Canadian or U.S. stock exchange. This presentation provides details on the types of claims that these companies are now facing in the wake of these changes, including the shift of allegations in securities class action filings over the past few years.

National Flood Insurance Program May be Reinstated This Week

Wed, 14 Apr 2010 08:39:00 GMT

The National Flood Insurance Program (the "NFIP") expired March 28, 2010. Since March 28, 2010, the NFIP has not been in operation and has not issued new and renewal policies and has not increased coverage amounts on existing policies. Flood insurance policies are required by lenders to close on real estate sales in flood hazard areas.

Yesterday the U.S. Senate voted to end floor debate on a bill that includes reinstating the NFIP retroactive to March 28, 2010. The reauthorization provision is contained in a bill that also includes the extension of unemployment benefits and COBRA health insurance subsidies. The House approved the bill on March 17, 2010. There is no guarantee, however, that the senators that voted to end the debate on the bill will vote in favor of passing the bill. If the legislation passes, the NFIP will only be extended until April 30, 2010, and the legislatures will have to extend the NFIP again in a few weeks.

As we previously reported here, industry groups believe that long-term reforms are necessary with respect to the NFIP and that the short-term extensions should be for a longer period of time since Congress is currently occupied with other pressing matters that jeopardize the NFIP’s continuity and certainty in the market.

We will continue to monitor NFIP-related developments and provide further updates at InsureReinsure.com.

Mississippi New Data Breach Notification Law

Wed, 14 Apr 2010 08:33:00 GMT

Mississippi is the latest state to adopt a data breach notification statute under House Bill 583. The new law, which goes into effective July 1, 2011, requires the following:

A person who conducts business in Mississippi must disclose any breach of security, as defined below, to all affected individuals.
Notice must be provided without unreasonable delay, subject to any criminal investigation and the completion of an investigation by the person to determine the nature and scope of the incident, to identify the affected individuals, or to restore the reasonably integrity of the data system.
Notice is not required, if after reasonable investigation, the person reasonably determines that the breach will not likely result in harm to the affected individual.
For the purpose of this statute, “breach of security” is defined to mean the “unauthorized acquisition of electronic files, media, databases or computerized data containing personal information of any resident of this state when access to the personal information has not been secured by encryption or by any other method or technology that renders the personal information unreadable or unusable.”

“Personal information” for this purpose means an individual’s first name or first initial and last name in combination with any one or more of the following data elements:

Social Security number;
Driver’s license number or state identification card number; or
An account number or credit or debit card number in combination with any required security code, access code or password that would permit access to an individual’s financial account.

Click here to view the full text of House Bill No. 583.

The District of Columbia, Guam, Puerto Rico and the Virgin Islands have also adopted data breach notification laws. Only four states, Alabama, Kentucky, New Mexico, and South Dakota, have not yet adopted data breach notification requirements.

Virginia New Medical Information Data Breach Law

Wed, 14 Apr 2010 08:29:00 GMT

The Commonwealth of Virginia recently enacted a law requiring notice of data breaches involving medical information. The new law is effective on January 1, 2011.

The new law, section 32.1-127.1:05 of the Virginia Code, requires any governmental entities or other organizations supported by public funds that own or license computerized data that includes medical information (defined below) to provide notification of a breach involving medical information to affected residents and the Office of the Attorney General. For this purpose, “breach” means unauthorized access and acquisition of unencrypted and unredacted computerized data that compromises the security, confidentiality, or integrity of medical information maintained by an individual or entity.

Notices must be sent without unreasonable delay, but may be reasonably delayed to allow the entity to determine the scope of the breach and restore the reasonable integrity of the system.

“Medical information” means the first name or first initial and last name in combination with and linked to any one or more of the following data elements that relate to a Virginia resident, when the data elements are neither encrypted nor redacted:

Any information regarding an individual’s medical history, mental or physical condition, or medical treatment or diagnosis by a health care professional; or
An individual’s health insurance policy number or subscriber identification number, any unique identifier used by a health insurer to identify the individual, or any information in an individual’s application and claims history, including any appeals records.

The required notice to affected individuals and the Attorney General must contain specific content, including:

A description of the incident in general terms;
The type of medical information that was subject to the unauthorized access and acquisition;
The general acts of the individual and entity to protect the personal information from further unauthorized access; and
A telephone number that the person may call for further information and assistance, if one exists.

Click here to view a copy of the bill.

Virginia has a general data breach notification law, in place since 2008, that is applicable to all individuals and companies with personal information of Virginia residents.

Ninth Circuit Holds That Infringement Of Patented Website Feature Constitutes "Advertising Injury"

Wed, 14 Apr 2010 08:16:00 GMT

The Ninth Circuit recently ruled that a general liability insurer must defend its insured against a patent infringement lawsuit relating to a feature on the insured’s website. Hyundai Motor Am. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, No. 08-56527 (9th Cir. Apr. 5, 2010).

The underlying suit concerned a feature on Hyundai’s website that allowed customers to input interests and needs and receive car recommendations and prices. Hyundai was sued by Orion IP, LLC. Orion alleged that Hyundai’s online system infringed upon its own patented system of generating customized product recommendations for customers. Hyundai’s insurer declined to defend it under its commercial general liability policy, arguing that no “advertising injury” was alleged. In the ensuing coverage suit, the U.S. District Court held that there was no coverage.

On appeal, however, the Ninth Circuit overturned the District Court’s decision. The backdrop of the case was a long line of California cases holding that patent infringement does not constitute “advertising injury” under general liability policies. These cases generally have held that infringement suits do not allege “advertising injury” merely because the insured advertised the infringing product. In order to constitute “advertising injury”, courts say, the advertising itself must cause the injury, not merely expose it.

The Ninth Circuit acknowledged these cases, but held that the Hyundai case presented a situation where advertising was alleged to have caused the injury. The court first found that the online system constituted “advertising” – defined by courts as “widespread promotional activities directed to the public at large” – and not mere individual “solicitation”. The court found that the online system “is widely distributed to the public at large, to millions of unknown web-browsing potential customers, even if the precise information conveyed to each user varies with user input.” Consequently, the court also found that the alleged infringement constituted “misappropriation of an advertising idea,” one of the enumerated offenses covered under “advertising injury”. The court noted that the allegedly infringing element was the advertising method itself – i.e., the online system – and not the product being advertised (i.e., the cars). For the same reason, the court held that the required “causal connection” existed between the insured’s advertising and the alleged injury.

Sixth Circuit Upholds An Insured’s Decision to Amend its Current Policy So As to Render A Prior Policy the Sole Primary Insurance

Tue, 13 Apr 2010 14:43:00 GMT

On March 11, 2010, the Court of Appeals for the Sixth Circuit affirmed a district court decision permitting an insured to shift the burden of primary coverage for various securities-related claims to its previous insurer by purchasing an extended reporting period (ERP) and adding an endorsement to its current primary policy making it specifically excess of the prior policy.

In Abercrombie & Fitch Co. v. Federal Insurance Company, Case No. 09-3096, Abercrombie’s insurer for the 2004-2005 policy period (Federal) refused to pay defense costs related to securities class actions, shareholder derivative suits, and an SEC investigation on the grounds that Abercrombie had improperly “colluded” with its subsequent insurer (National Union) to shift the burden of primary coverage to Federal, thereby prejudicing Federal’s right of contribution from National Union in breach of the policy’s cooperation clause. According to Federal, Abercrombie’s decision to purchase the ERP and to add an endorsement to the National Union policy making that policy excess to the Federal policy abrogated Federal’s right to pro rata contribution from National Union. In response, Abercrombie argued that the cooperation clause did not apply to Abercrombie’s negotiations or agreements with other insurers, and that the provision applied only to the parties’ rights and obligations in connection with the defense and settlement of claims made against Abercrombie.

The Sixth Circuit agreed with Abercrombie and distinguished between business decisions made by an insured that “prejudice” an insurer’s “position,” and the rights and obligations of insureds and insurers that are specifically listed in a typical cooperation clause. The Court noted that the ERP provision in the Federal policy did not limit Abercrombie’s ability to elect ERP coverage in the event that a claim was made after the Federal policy elapsed but before Abercrombie’s time for selecting the ERP option expired. The Court also held that Federal had waived any argument based on the duty of good faith and fair dealing because it did not raise the argument before the district court.

A copy of the decision is available here.

Compliance and Claims Issues for Foreign (Re)insurers Arising from the Chile Earthquake

Tue, 13 Apr 2010 12:10:00 GMT

On April 12, 2010, Machua Millett of EAPD's Insurance and Reinsurance Department provided a brief webcast concerning compliance and claims issues arising from the Chile Earthquake. To view the webcast, please click here. To view the PowerPoint for the webcast, please click here.

If you would be interested in learning more about the Chilean claims process or regulatory scheme and/or further discussing the evolving claims situation in Chile following the earthquake, please feel free to contact Mr. Millett at mmillett@eapdlaw.com.

Katrina: Claims To Continue Against Defendants Who Allegedly Caused the Emission of Greenhouse Gases That Added to the Ferocity of Hurricane Katrina

Tue, 13 Apr 2010 10:27:00 GMT

On October 16, 2009, in a lawsuit brought by owners of property along the Mississippi Gulf coast that sustained damage from Hurricane Katrina, the U.S. Court of Appeals for the Fifth Circuit held that the plaintiffs have standing to assert public and private nuisance, trespass and negligence claims against the defendants who caused the emission of greenhouse gases which are alleged to have ultimately added to the ferocity of Hurricane Katrina. Further, the Fifth Circuit determined that such claims are justiciable and do not present a political question. Comer, et al. v. Murphy Oil USA, et al., No. 07-60756 (5th Cir. Oct. 16, 2009). (Click here for a copy of the Court’s opinion).

The plaintiffs filed a putative class action against various corporations alleging that the defendants’ operation of energy, fossil fuels, and chemical industries in the U.S. caused the emission of greenhouse gasses that contributed to global warming that in turn caused a rise in sea level and added to the strength of Hurricane Katrina, which combined to destroy their property. The plaintiffs assert claims for public and private nuisance, trespass, negligence, unjust enrichment, civil conspiracy and fraudulent misrepresentations and seek compensatory and punitive damages.

The defendants moved to dismiss the lawsuit on the grounds that the plaintiffs lacked standing to assert their claims and that the plaintiffs’ claims presented nonjusticiable political questions. The district court granted the motion dismissing the claims, stating that “adjudication of Plaintiffs’ claims in this case would necessitate the formulation of standards dictating, for example, the amount of greenhouse gas emissions that would be excessive and the scientific and policy reasons behind these standards. These policy decisions are best left to the executive and legislative branches of the government….”

The plaintiffs appealed the district court’s decision. In reviewing the district court’s decision, the Fifth Circuit determined that the plaintiffs have standing to assert their public and private nuisance, trespass and negligence claims and that none of these claims presented nonjusticiable political questions.

In reaching its opinion, the Court first concluded that these three claims satisfied the constitutional minimum standing requirements because “[t]hese state common-law tort claims, in which plaintiffs allege that they sustained actual, concrete injury in fact to their particular lands and property, can be redressed by the compensatory and punitive damages they seek for those injuries.” The Fifth Circuit then considered whether these claims presented a nonjusticiable political question, and held that “because those claims do not present any specific question that is exclusively committed by law to the discretion of the legislative or executive branch, we hold that they are justiciable.” The Fifth Circuit further noted that whether the defendants are liable to the plaintiffs in damages under these common law torts are justiciable “because they plainly have not been committed by the Constitution or federal laws or regulations to Congress or the president.” Finally, the Fifth Circuit held that the state law claims were properly dismissed for standing reasons.

We will continue to provide updates on this and all Katrina-related coverage litigation on www.InsureReinsure.com.

Join the U.S. Re Under 40s for a Networking Happy Hour in Philadelphia on April 29

Tue, 13 Apr 2010 10:15:00 GMT

HK: New Japanese Insurance Law Concerning Insurance Contracts Comes Into Force

Wed, 07 Apr 2010 11:29:00 GMT

The new Japanese Insurance Act (the Insurance Act), which was passed by the Japanese Diet in May 2008 came into force on 1 April 2010. The Insurance Act will regulate insurance contracts generally (although the Commercial Code will continue to regulate marine insurance). The Insurance Act represents the first significant revision of insurance law in Japan for about 100 years. The stated key objectives of the Insurance Act are to adapt the rules of insurance contracts to the needs of modern society and to revise the law to enhance the protection of policyholders.

In response to recent claims payment delinquency problems and in an effort to protect policyholders, the Insurance Act will invalidate certain provisions adverse to policyholders, limit the duty of disclosure and establish requirements on the timing of payments. Consequently, insurance companies have had to undertake various initiatives to conform to the Insurance Act, such as revising their insurance policies, restructuring systems for the payment of insurance claims and revising their claims payment documentation.

As insurance policies issued in Japan are subject to approval by the Financial Services Agency, any proposed changes to the general terms must first be approved by the Financial Services Agency.

UK: High Court Rules no Liability for Lack of Timely Notice

Wed, 07 Apr 2010 11:26:00 GMT

The English High Court, in Loyaltrend Limited and Sye Razvi v Brit UW Limited & Others [2010] EWHC 425 (Comm), ruled in favour of the Second Defendant (Brit) because the Claimants failed to notify the insurer in a timely manner as specified in the policy.

The Claimants insured property (a shop) under a continuous insurance policy from 2002 to 2006 through its broker. Unknown to the Claimants, the cover was provided by three different insurers: the First Defendant in 2002/03 year, Brit in 2003/04 year, and the Third Defendant between 2004 and 2006. Subsidence occurred on the property at the end of 2003 as the Brit policy began. Water damage then occurred in the Autumn of 2004. On discovery that there was more than one insurer the Claimants withdrew their claims against the First and Third Defendants and claimed on the Brit policy for damage and business interruption in early 2005. Brit refused to pay and so the Claimants commenced legal proceedings. On the issue of when the damage-causing event took place, Mr Justice Mackie noted that although there was a considerable "step-change" in October 2004 to what was a gradual process, he followed the experts findings that the damage first occurred back in 2003 when the initial subsidence happened.

General Condition 5 of the Brit policy (which was a condition precedent to liability) required the Insured to give "immediate notice to the Insurers on the happening of any injury or damage in consequence of which a claim is or may be made under this policy". Mr Justice Mackie confirmed that the test as to whether notice had been given was objective. Following his finding that the initial damage had occurred in late 2003, the judge found that the Claimants had therefore failed to give "immediate" notice as required by the policy and therefore ruled that Brit had no liability for the compensation sought.

Jury Awards $141 Million Against Pfizer in Connection With Off-Label Use of Neurontin

Wed, 07 Apr 2010 11:23:00 GMT

A federal jury in Boston recently returned a verdict against Pfizer Inc. in connection with claims that Pfizer unlawfully promoted off-label uses of its anti-epilepsy drug Neurontin. The plaintiffs, a group of hospitals and HMOs, claimed that Pfizer had fooled them into believing that Neurontin was effective in the treatment of bipolar disorder, neuropathic pain and other conditions. At trial, the plaintiffs argued that Pfizer had suppressed its own research findings that the drug was ineffective when used for the off-label treatments.

The jury’s verdict included $47 million in damages, the largest component of which was related to the alleged promotion of Neurontin for the treatment of neuropathic pain. The award was tripled to $141 million by operation of the Racketeer Influenced and Corrupt Organizations Act, which was the basis for some of the plaintiffs' claims.

Pfizer has announced that it will appeal the verdict.

Massachusetts Health Insurers Sue Over Rejected Rate Increases

Tue, 06 Apr 2010 13:15:00 GMT

Blue Cross Blue Shield of Massachusetts and the Massachusetts Association of Health Plans have sued the Massachusetts Division of Insurance (DOI) after the DOI's decision last week to reject most proposed rate increases for small businesses for the current calendar quarter. The Massachusetts Association of Health Plans, which includes Harvard Pilgrim Health Plan, Fallon Community Health Plan, Tufts Health Plan, Neighborhood Health Plan, and Health New England, claimed that the DOI’s action could threaten their solvency and even the stability of health reform in Massachusetts. All of the insurers except Harvard Pilgrim lost money in 2009.

The lawsuit claims, among other things, that the DOI's rejection of most of the proposed rate hikes is tantamount to a rate cap and that the DOI does not have the legal authority to cap rates. The complaint seeks a preliminary injunction to keep rates in place until the dispute is resolved, and a trial date of no later than June 15. The DOI has stated that the excess premiums would have to be refunded or credited to small businesses' accounts.

UK: Speech by Sally Dewar - Taking the FSA's Corporate Governance Agenda Forward

Tue, 06 Apr 2010 13:01:00 GMT

Sally Dewar, the Financial Services Authority's (FSA) managing director of Risk, gave a speech entitled "Taking the FSA's corporate governance agenda forward" at the City Corporate Governance and Remuneration Summit on 30 March 2010. To view the speech, please click here.

Sally Dewar noted that corporate governance was currently near the top of the FSA agenda. The FSA is currently in the process of a consultation entitled "Effective corporate governance (Significant influence controlled functions and the Walker review)". The consultation paper was published in January 2010 and the consultation closes on 28 April 2010. To view our previous blog announcing the FSA's consultation on effective corporate governance, please click here.

The matters discussed during Sally Dewar's speech included:

the FSA's proposals to improve corporate governance;
the context behind the proposed corporate governance changes;
what the FSA hopes to achieve with its proposals to improve corporate governance;
how the FSA aims to make the proposals work in practice; and
the Walker Review's recommendations.

Two main points were identified by Sally Dewar as key to improving regulation. These were:

that good culture and behaviours in firms is being driven by senior management; and
that good culture and behaviours are being reinforced by effective corporate governance and the role of the boards.

Last Week in DC: The Healthcare Reform Debate – April 6, 2010

Tue, 06 Apr 2010 12:59:00 GMT

As Members of Congress returned home last week to discuss the new healthcare reform law with their constituents, President Obama put the finishing touches on the process by signing a package of healthcare corrections into law. Meanwhile, Health and Human Services (HHS) Secretary Kathleen Sebelius wasted no time in announcing her department’s intent to clarify potentially confusing language in the new law.

PRESIDENT SIGNS RECONCILIATION BILL:

President Obama signed into law the second piece of his healthcare overhaul last Tuesday – the reconciliation bill that makes revisions to the larger healthcare bill (Public Law 111-148) that he signed the week of March 22. As previously noted, the reconciliation bill will soften the excise tax on high-cost “Cadillac” health insurance plans and will increase subsidies for lower-income individuals and families who will be required to buy health insurance under the new law.

In a shift away from healthcare, the President spent the majority of the signing ceremony touting the less-discussed provisions of the reconciliation bill – those that will overhaul the student loan system by making the federal government the sole originator of loans for postsecondary education and by capping repayment of loans at 10 percent of a new borrower’s income. In addition, the legislation will increase the number and dollar amount of Pell grants provided to lower-income students.

SPOTLIGHT SHIFTS TO HEALTH & HUMAN SERVICES:

HHS Secretary Sebelius spent time last week informing health insurance companies that when her department begins to write regulations to implement portions of the new healthcare law this year, it will explicitly prohibit insurers from excluding coverage to children beginning in September. This step marks an effort by HHS to end recent controversy over confusing legislative language in Public Law 111-148 that some have noted contains a potential loophole that may allow insurers to deny coverage for children with pre-existing conditions.

NEXT STEPS:

We continue to closely monitor HHS and other relevant federal agencies as they begin work on implementation of the complex healthcare law and will provide timely updates as notable developments occur.

UK: Government Consultation on Strengthening the Administration Regime for Insurers

Thu, 01 Apr 2010 10:31:00 GMT

The UK Government has announced a consultation on proposals to strengthen the administration regime for insurers, in particular to improve the protection and payment of benefits for persons insured with companies facing financial difficulties and addressing gaps in the administration regime for insurers as compared with the liquidation regime. The proposals include:

applying to administration the existing rules for valuing insurance contracts in liquidation; and
revising the objectives of administration in insurance company cases by:

requiring administrators to provide assistance to the Financial Services Compensation Scheme to enable it to administer its compensation scheme and secure continuity of insurance contracts; and
applying to administration existing powers relating to continuity of long term insurance contracts on the liquidation of an insurer.

The consultation closes on 25 June 2010.

Click here to view the press release announcing the consultation and click here to view the consultation document itself.

Third Parties (Rights against Insurers) Bill Receives Royal Assent

Thu, 01 Apr 2010 10:28:00 GMT

As previously reported here, the Third Parties (Rights against Insurers) Bill was introduced into Parliament in November 2009. It is designed, in particular, to remedy the shortcomings of current legislation in protecting the rights of third party claimants against insurers of the liabilities of insolvent defendants.

The Bill completed its passage through the House of Lords on 1 March 2010 and had its Second Reading in the House of Commons on 10 March 2010. Little debate was raised in the Commons at the Committee and Report Stages or the Third Reading. The Bill was described as a welcome piece of legislation that was lacking both complexity and political controversy.

The Bill received Royal Assent on 25th March 2010 and is now, as an Act of Parliament, part of the Law of England and Wales, Northern Ireland and Scotland.

UK: Court of Appeal Order Retrial in Luxury Car Credit Hire Case

Wed, 31 Mar 2010 10:52:00 GMT

In Darren Bent v (1) Highways and Utilities Construction Ltd; (2) Allianz Insurance Plc [2010] EWCA Civ 292, the Court of Appeal was asked to order a retrial of the first instance decision of Mr Justice Yelton sitting in Cambridge County Court.

The case concerned the hire in February 2007, by Darren Bent (the Sunderland and England striker), of an Aston Martin DB9, worth approximately £105,000, following an accident caused by an Allianz policyholder which resulted in damage to Mr Bent's sports car.

The Aston Martin was hired from a credit hire company, Accident Exchange Ltd, for 94 days at a total hire cost of £63,406.90 (Mr Bent's damaged car cost £72,000). The defendants argued that:

the Aston Martin was a more expensive car and therefore likely to be more costly to hire than Mr Bent's own car; and
pursuant to Mr Bent's duty to mitigate, he ought to have hired from the "spot" market which would have been cheaper by someone paying immediately rather than on credit.

Authorities state that in the case of 'pecunious' claimants, damages to be awarded are normally assessed at the spot hire rates - the rate at which a broadly similar car could be had on the market.

Yelton J however did not assess the spot hire rate for a broadly similar car for a number of reasons. Firstly, he stated that in these circumstances, the court was dealing with a very specialised market (the luxury sports car market); and secondly, that the defendants had not provided proper evidence as to what the spot rate was at the material time (the judge did however have spot rates for 2008). In the absence of such evidence Yelton J found in favour of Mr Bent.

Lord Justice Jacob delivering the judgment of the Court of Appeal ordered a retrial. He stated that at the heart of Yelton J's reasoning was "that evidence of the position at a somewhat later date than that of the hire is irrelevant." He rejected that assumption stating that when assessing valuation evidence, it was often the case that the evidence would be of the same or similar things at different dates however appropriate adjustments should be made. Further, "working with comparables and making adjustments is the daily diet of judges concerned with valuation in all sorts of fields" and therefore evidence concerning the spot rate a year later from the time of the accident would be relevant.

London Insurers: Iran on High Risk Area List as Sanctions Loom

Wed, 31 Mar 2010 09:15:00 GMT

According to a recent report from Reuters, London's marine insurance market has added Iran to a list of areas deemed high risk. The Lloyd's Market Association (LMA) announced the move on Monday, March 22, 2010, ahead of possible sanctions being pushed by the U.S., among other countries. The Reuters article, authored by Jonathan Saul, further reported that the London marine insurance market, which plays an influential role in the global marine insurance industry, added Iran to a list of areas it considered high risk for merchant vessels and prone to war, strikes, terrorism and related perils through its Joint War Committee on March 11. In that regard, the secretary of the LMA, which represents the interests of all underwriting businesses in the Lloyd's market, stated that ships transiting the area will now be required to provide notice to the underwriters of any voyages up to 12 nautical miles off the coast of Iran. You can view the Reuters article by clicking here.

In related news, Reuters also reported on March 24 that a draft of the U.N. sanctions drafted by the U.S. "urge[s] vigilance against Iran's central bank, ban insurance and reinsurance of shipments to and from Iran and would blacklist several Iranian shipping firms," among other sanctions. You can view this Reuters article by clicking here.

EU: European Commission Publishes a Review of the European Company Statute

Wed, 31 Mar 2010 08:20:00 GMT

The European Company Statute (Regulation 2157/2001, which is directly applicable in EU member states) was adopted on 8 October 2001 and came into force on 8 October 2004. It required the Commission to report on its application five years after coming into force. The Commission published its consultation on 23 March 2010, together with a report by external consultants. The consultation aims to test the findings of the external study with all interested stakeholders. The Commission is also organising a high-level conference on the statute on 26 May 2010.

The external study covers a number of key issues, including:

drivers for setting up a European Company (SE)
differences between national legislation relating to SEs
main trends in the distribution of SEs across Europe
practical problems encountered in the course of setting up or running an SE
suggestions for amendments to the SE legislation to increase its attractiveness for business.

Among the proposals for amendment made by the external study are:

simplification of the process of establishing an SE, including permitting private limited companies to form an SE by merger or conversion
reducing the minimum capital requirement for SEs
aligning the rules of the SE legislation with other European legislation, including the cross-border mergers directive and the proposals for the establishment of a European private limited company.

The consultation can be found by clicking here. The consultation closes on 23 May 2010.

NAIC Provides Details Regarding Upcoming Hearing on Stranger Owned Annuities

Tue, 30 Mar 2010 10:29:00 GMT

This entry updates our March 24, 2010 posting.

The NAIC issued a press release earlier this month announcing its intent to hold a public hearing on the emergence of stranger originated/owned annuity transactions (“STAT”), but did not specify the date or location of the hearing. On March 28, 2010, the NAIC issued a second release providing additional details about the public hearing. According to the second release, the hearing will be held in Washington, DC on Thursday, May 20, 2010, and will focus on the practice of marketing annuities to seniors and terminally ill patients for the benefit of investors or intermediaries. Specifically, the hearing will examine the following questions:

Are STATs lawful?
How do they affect insurable interest?
Is there enough consumer protection in current model laws and regulations?
If there is not, how should the models and regulations be developed or tightened?

The hearing will include testimony from consumers, state regulators and industry representatives.

We will continue to monitor this topic and provide further updates on InsureReinsure.com.

Idaho Amends Third Party Administrator Law

Tue, 30 Mar 2010 10:20:00 GMT

The Idaho Insurance Code has been amended to require that all third party administrators ("TPAs") doing business in Idaho be either registered with or licensed by the Idaho Department of Insurance ("DOI"). The amendment provides that TPAs doing business with only self-funded employer plans not regulated by the DOI need not be licensed, but must register with the DOI using a registration form available on the DOI website. Under the amendment, all other TPAs operating in Idaho must be licensed by the DOI. The amendment has a retroactive effective date of February 1, 2010.

According to a press release issued by the DOI on March 18, 2010, the amendment was adopted in order to bring Idaho into compliance with the National Association of Insurance Commissioners model act regarding third party administrators.

Chinese Drywall – Federal Judge Rules No Coverage For Drywall Remediation

Tue, 30 Mar 2010 10:15:00 GMT

On March 24, 2010, Judge Rebecca Beach Smith of the U.S. District Court for the Eastern District of Virginia dismissed claims filed by a Virginia Beach-based builder seeking insurance coverage for the costs of voluntarily remediating Chinese Drywall.

In Builders Mutual Insurance Company v. Dragas Management Corporation, the insurers sought a declaration that the insurance policies did not cover Dragas’ efforts to remediate 73 condominiums constructed with drywall manufactured in China because the builder’s remediation efforts were voluntary and had not been compelled by court or governmental order. The Court agreed, ruling that Dragas had not proven that it was legally obligated to pay for the remediation, a prerequisite to coverage of the insurance claim. The Court allowed Dragas 14 days within which to amend its claims to demonstrate that it was legally obligated to remediate the condominiums. The Court’s opinion did not address the applicability of the total pollution exclusion.

For more information, please click here.

UK: Employers' Liability Insurance Bureau Bill 2009-10 - Update

Tue, 30 Mar 2010 08:48:00 GMT

We have previously reported here, on the Employers' Liability Insurance Bureau Bill, which is currently subject to scrutiny in the UK Parliament. The Bill seeks to establish a 'fund of last resort', to be used in instances where an employer is insolvent or does not hold insurance compulsory under the Employer's Liability (Compulsory Insurance) Act 1969. This is seen to be a particular problem in claims relating to asbestos.

The Bill received its first reading in the House of Commons on 6 January 2010. Although scheduled for a second reading in February this year, further parliamentary action has been postponed until 23 April 2010.

The latest version of the Bill can be found here.

UK: Alastair Darling's Budget Proposes Tax Break for Asbestos Trusts

Tue, 30 Mar 2010 08:44:00 GMT

Alastair Darling's 2010 Budget includes provisions designed to help asbestos trusts which were set up by companies prior to 24 March 2010 to meet their asbestos liabilities. Under the proposal, the trustees of such a trust would be exempt from income tax, capital gains tax and inheritance tax retrospectively from 6 April 2006. The Government has promised to introduce legislation to facilitate this provision in the next Parliament.

Such tax breaks could really help asbestos trusts which attempt to meet a company's liability for asbestos related diseases. However, as the election is imminent and the legislation has not been put forward as yet, it is uncertain whether the provision will ever become law.

UK: High Court Refuses Compensation for "Toxic Sofa" Victims for Breach of Claims Control Clause

Tue, 30 Mar 2010 08:41:00 GMT

The English High Court, in Clare Horwood & Others v Land of Leather (In Administration) & Zurich Insurance PLC & Others [2010] EWHC 546 (Comm), held that Zurich did not have to pay compensation to customers who suffered burns from "toxic sofas" sold by the now-defunct Land of Leather. Zurich had refused to provide cover for the Land of Leather claims on the basis that the furniture company had breached a condition of its insurance policy by settling, without Zurich's consent, its claim against the supplier of the toxic furniture.

The key issue surrounded the interpretation of the claims control condition in the policy:

"The Insured shall not, except at his own cost, take any steps to compromise or settle any claim or admit liability without specific instructions in writing from the Insurer…but the Insurer shall for so long as they shall so desire have the absolute conduct and control of all proceedings in respect of any claims for which the Insurer may be liable…and may use the name of the Insured to enforce for the benefit of the Insurer…any claim for indemnity or damages against any third party".

The claimants argued that this condition only prohibited Land of Leather from settling claims made against it, not claims made by Land of Leather against a third party. Mr Justice Teare disagreed. He concluded that the wording giving Zurich control and conduct of "all proceedings", and the wording providing that the Insurer may use the name of the Insured not only to defend any claim but also make any claim for indemnity, resulted in the control of claims conferred on the Insured extending to not only claims against Land of Leather but also to claims by Land of Leather against others. He added that it would be absurd if the Insurer had control of proceedings commenced in the name of the Insured against others but yet the Insured was under no prohibition not to settle such claims.

Due to the breach of one of the fundamental terms of the policy, Zurich is now entitled to reject any "toxic sofa" claims, leaving hundreds of injured without any form of compensation. It remains to be seen whether this judgment will be appealed to the Court of Appeal.

HK: The Effect of an Arbitration Agreement in an Insurance Policy

Tue, 30 Mar 2010 08:33:00 GMT

The recent High Court judgment in Rondabosh International Ltd v China Ping An Insurance (Hong Kong) Co Ltd [2009] HKEC 2103 demonstrates the effect of an arbitration agreement in an insurance policy.

Rondabosh was insured under a policy issued by China Ping, which covered stock in a warehouse. The stock was damaged by flooding in June 2008. In July 2009, Rondabosh issued a Statement of Claim seeking some HK$1.5 million from China Ping in respect of the damaged stock. In connection with Rondabosh’s claim, there were two applications before the court: (i) China Ping’s application to stay Rondabosh’s claim, pursuant to an arbitration agreement in the policy, and (ii) Rondabosh’s application to the Court for an interim payment of HK$800,000.

Where there is a written agreement to arbitrate, the court normally has no discretion and must hold the parties to their agreement and stay a pending action and refer it to arbitration. The court can only refuse to grant a stay in circumstances where the arbitration agreement is "null and void, inoperative or incapable of being performed" (section 6 Arbitration Ordinance (Cap. 341) and article 8 of the United Nations Commission on International Trade Law Model Law on International Commercial Arbitration 1985 (with amendments as adopted in 2006)).

Rondabosh contended that there was a dispute as to China Ping's liability under the policy because China Ping had not accepted that Rondabosh had an insurable interest in some of the stock. Rondabosh argued that, in such circumstances, the arbitration agreement was "inoperative" as it only covered disputes as to quantum and not liability. Mr Justice Reyes found that China Ping had unequivocally accepted liability in two open letters and that, given the admission of liability, the dispute was only as to quantum and so well within the scope of the arbitration agreement. Therefore, Reyes J found that the court had no jurisdiction to determine Rondabosh’s application and the dispute as to quantum should be decided by an arbitration tribunal as agreed.

This decision reaffirms the principle that when an insurance policy incorporates an arbitration clause, the court must stay any pending action and refer it to arbitration. The court should only refuse such a stay if it finds the arbitration agreement to be "null and void, inoperative or incapable of being performed". Moreover, the High Court’s decision emphasises the need to draft arbitration clauses in insurance policies as precisely as possible.

NAIC Spring National Meeting Update: Regulatory Modernization (EX) Task Force

Mon, 29 Mar 2010 11:05:00 GMT

The Regulatory Modernization (EX) Task Force (the "Task Force"), chaired by Commissioner Kim Holland (Oklahoma) met on Friday, March 26, 2010 during the NAIC Spring National Meeting. The Task Force is new for 2010 and has been established (according to the draft charges presented to the Task Force) "to develop a plan for building member consensus and necessary constituency support for national uniformity in areas that will enhance the existing strengths of state insurance regulation, and that are consistent with NAIC guiding principles on regulatory modernization".

The Task Force heard from Maryland State Senator Delores Kelley, New Mexico State Senator Carroll Leavell (vice president of the National Conference of Insurance Legislators ("NCOIL")), Alabama State Representative Greg Wren and Rhode Island State Representative Brian Patrick Kennedy, giving legislative perspectives on regulatory modernization, and also from Dennis Johnson, President and CEO of United Heritage, and SueAnn Schultz, Senior VP and General Counsel of IMA Financial Group who had been asked to give industry perspectives.

Both of the industry representatives spoke frankly about their desire for more uniform regulatory standards. Mr. Johnson encouraged States to adopt uniform requirements and procedures for financial statement filings and encouraged the adoption by all States of the Interstate Compact in relation to new product review. Ms. Schultz encouraged reform of producer licensing to improve reciprocity and eliminate multiple layers of licensing requirements. She also suggested that all States would benefit from a clear tax regime in relation to surplus lines business.

If you have any questions about other developments at the NAIC Spring National Meeting, please contact EAPD's Alan Levin, Nick Pearson or Chris Sage who attended the National Meeting.

NAIC Update: International Insurance Relations (G) Committee

Mon, 29 Mar 2010 11:02:00 GMT

The NAIC's International Insurance Relations (G) Committee (the "Committee"), chaired by Commissioner Kevin McCarty (Florida) met on Friday, March 26, 2010, during the NAIC Spring National Meeting. The Committee received an update on International Strategy and Action Plans and discussed International Association of Insurance Supervisors ("IAIS") strategic planning, including the Common Framework or Supervision of Internationally Active Insurance Groups ("Common Framework").

The Committee received reports from its International Regulatory Cooperation Working Group and from the Solvency Modernization Initiative Task Force.

The Committee also heard from Yoshi Kawai, Secretary General of the IAIS, who spoke about the IAIS's new Financial Stability Committee and the Common Framework.

Dr. Ray Spudeck (Florida) reported on the work of the Joint Forum (established in 1996 under the aegis of the Basel Committee on Banking Supervision ("BCBS"), the International Organization of Securities Commissions ("IOSCO") and the IAIS. The Joint Forum released a Report on the Differentiated Nature and Scope of Financial Regulation in January 2010 and is looking at diversification and risk modelling. The Joint Forum is also looking at an update of its 1999 Paper on Risk Concentrations in Financial Conglomerates.

The Committee also heard that the NAIC had submitted comments to the Committee of European Insurance and Occupational Pensions Supervisors in relation to its consultation paper CP 78 (Draft Level 2 Advice on Technical Criteria for assessing 3rd country equivalence). A copy of the consultation and the NAIC's comments can be found by clicking here. The comments emphasise the NAIC's view that equivalence should be measured on an outcomes-based approach.

If you have any questions about other developments at the NAIC Spring National Meeting, please contact EAPD's Alan Levin, Nick Pearson or Chris Sage who attended the National Meeting.

District of New Jersey Dismisses Securities Fraud Claims Against Company That Suffered Data Breach

Mon, 29 Mar 2010 10:59:00 GMT

Late last year, the United States District Court for the District of New Jersey dismissed a securities fraud litigation that had been brought against a payment card processor in connection with the theft, by cybercriminals, of credit and debit card information from the company’s computer system. In re Heartland Payment Systems, Inc. Securities Litigation, Civ. No. 09-1043 (D.N.J., Dec, 7, 2009). As the court explained, shareholders of the defendant initiated their securities fraud claims after the defendant disclosed the data breach and its share price fell. The shareholder plaintiffs based their claims on allegations that the defendant had “misrepresented the state of its computer network security” and “concealed [an earlier] attack.” The misrepresentations were allegedly made during “earnings conference calls” and in financial statements filed with the Securities and Exchange Commission.

On the defendant’s motion to dismiss, the court examined the claims under the heightened pleading standards provided by the Private Securities Litigation Reform Act of 1995 (PSLRA). The court explained that the PSLRA requires fraud to be pleaded with particularity, and also requires plaintiffs to state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind. Citing the Supreme Court’s decision in Tellabs, Inc. v. Makor Issues & Rights Ltd., 551 U.S. 308 (2007), the court explained that a complaint will adequately allege state of mind only if a reasonable person would deem the inference of scienter to be at least as strong as any inference of non-fraudulent intent.

The court found that the plaintiffs had failed to meet this heightened pleading requirement. In particular, the court found that the defendant’s statements regarding its computer security, when examined with “careful attention to context,” were “not fraudulent.” The court also found that the plaintiffs had “failed to allege scienter.” Having found that the complaint failed to adequately allege two of the elements of its fraud claims, the court dismissed the complaint with prejudice.

To read a copy of the court’s decision, please click here.

Last Week in DC: The Healthcare Reform Debate – March 29, 2010

Mon, 29 Mar 2010 10:47:00 GMT

Healthcare reform’s long and often bumpy journey through Congress came to a close last week, as President Obama signed into law the 2,000+ page legislation that will overhaul the nation’s healthcare system. Simultaneously, the Senate worked to clear a package of corrections to the new law via the budget reconciliation process, changing it ever so slightly and sending it back to the House for one final vote.

PRESIDENT SIGNS HEALTHCARE BILL:

On Tuesday, supporters of Democrats’ healthcare reform efforts – including House, Senate and Administration Members, in addition to other attendees of a symbolic nature, including the late Senator Edward Kennedy’s wife, Vicki – gathered at the White House to watch President Obama sign healthcare reform legislation into law (Public Law 111-148).

SENATE AND HOUSE APPROVE FINAL CORRECTIONS PACKAGE:

Back on Capitol Hill, the Senate spent the week debating and ultimately passing the package of fixes to PL 111-148 that House Democrats insisted upon when they agreed to send the comprehensive legislation to President’s desk. As previously discussed, such corrections included Medicaid enhancements and fairness provisions, additional affordability credits, and a delay on a new tax on high cost health plans, and were sent to the Senate using the budget reconciliation process. Under reconciliation’s complex rules, the legislation – which, in addition to healthcare provisions included an overhaul of the federal student loan system – was protected against a filibuster and could win approval by a simple majority vote, as opposed to the 60 votes Democrats would normally need (and no longer had) to pass legislation.

Republicans acknowledged that there was little their party could do to stop or change the legislation substantially, but they worked to offer a variety of amendments that had little chance of passing, in addition to working to use the complicated rules governing the reconciliation process to try and make minor changes that would not alter the scope of the legislation, but would force another vote in the House. Republicans were successful on two accounts, finding small provisions that the Senate Parliamentarian agreed should be stricken from the bill because they violated the strict reconciliation rules.

The package won approval in the Senate on Thursday afternoon, by a vote of 56-43, with three moderate Democrats joining all present Republicans in opposing the legislation. Due to the aforementioned minor changes, the legislation then moved back to the House for final approval, which came Thursday evening by a vote of 220-207.

The reconciliation bill was then sent to the White House, where President Obama is expected to sign the legislation into law on Tuesday.

NEXT STEPS:

The formal legislative process has reached its conclusion, but we will continue to closely monitor the issue of healthcare reform, as the action now moves to the federal agencies to carry out the monumental task of implementing the new law. The Department of Health and Human Services will run the majority of such efforts, many of which need to be completed in the next six months – such as new rules to allow dependents to remain on their parents’ insurance plans until the age of 26.

We will also continue to follow the efforts of the President and Members of Congress on both sides of the aisle as they craft their messaging strategies toward voters in advance of November’s midterm elections. Further, we will keep an eye on attempted legal challenges to the new law, as several states continue to question its constitutionality.

The Healthcare Reform Legislation ultimately adopted may affect many segments of the healthcare industry, including providers and suppliers, insurers, educational institutions, pharmaceutical and medical device companies, as well as employers and other constituencies within the healthcare industry at large. We will be releasing further advisories addressing the impact of the legislation on specific practice areas and industries.

Chinese Drywall – Second Bellwether Trial Complete

Mon, 29 Mar 2010 10:41:00 GMT

As reported here, the first federal trial in the nationwide Chinese drywall controversy began on February 19th, 2010 in New Orleans, La. That trial, involving defendant Taishan Gypsum, has now concluded and Proposed Findings of Fact and Conclusions of Law have been submitted for consideration. The second bellwether trial, Tatum Hernandez, et al v. Knauf Plasterboard (Tianjin) Co., Ltd., involves manufacturer Knauf Tianjin and began on Monday March 15, 2010. The issue in both the first and second bellwether trials is the scope of remediation necessary for homes with Chinese manufactured drywall. Both trials were bench trials. The Proposed Findings of Fact and Conclusions of Law for the second bellwether trial are due Monday March 29, 2010 after which Judge Eldon Fallon will take the matters under consideration.

Consult www.InsureReinsure.com for further updates on the Chinese Drywall bellwether trials.

Lehman Defendants' Motion to Dismiss Granted in Part and Denied in Part in In re: Lehman Brothers Mortgage-Backed Securities Litigation

Mon, 29 Mar 2010 10:38:00 GMT

On February 17, 2010 Judge Kaplan issued a written opinion granting in part and denying in part the individual Lehman defendants' motion to dismiss in In re: Lehman Brothers Mortgage-Backed Securities Litigation.

A copy of the opinion can be found here. Our discussion of Judge Kaplan's ruling with respect to the Ratings Agencies can be found here.

With respect to Article III standing, Judge Kaplan granted the individual Lehman defendants' motion to dismiss as to 85 of the 94 offerings of mortgage-backed securities at issue. The court held that since the lead plaintiffs had only purchased mortgage-backed securities ("MBS") from nine (9) offerings, the plaintiffs only suffered an Article III injury with respect to those offerings.

As to the nine (9) offerings for which the plaintiffs have standing, the court held that the allegations relating to two of the three categories of misstatements failed to state a claim:

Conflict of interest: The court held that the allegations regarding the individual Lehman defendants' failure to disclose the relationship between Lehman and the Ratings Agencies were insufficient as a matter of law because the conflict of interest has been publicly known since the January 2003 SEC report that exposed the conflict of interest between issuers and ratings agencies.
Failure to disclose inadequate credit enhancements: The court found that the allegations that the registration statements failed to disclose that the securities had inadequate credit enhancements were insufficient because such statements were based on inactionable opinions by the Ratings Agencies.
Departure from underwriting guidelines: The complaint alleges that the offering documents were misleading because they failed to disclose that the loan originators did not comply with the disclosed underwriting guidelines that were designed to ensure a borrower’s ability to repay. The essence of this claim is that the loan originators systematically disregarded the stated underwriting guidelines, including the procedures for originating loans pursuant to the guideline exceptions, and ignored the borrowers’ ability to repay in order to originate as many mortgage loans as possible. The court found these allegations created a reasonable inference that the offering documents description of the underwriting practices were materially misleading because the plaintiffs provide factual allegations about widespread departures from underwriting standards across the loan origination industry, including the originators of the loans backing the MBS, and the impact that these practices allegedly had on the MBS.

Cornerstone’s Review and Analysis of 2009 Securities Class Action Settlements

Mon, 29 Mar 2010 10:30:00 GMT

Cornerstone Research released its report (here) on its review and analysis of 2009's securities class action settlements. Of note, in 2009:

there were 103 court-approved securities class actions settlements;
as compared to 2008, approved settlements increased from 97 in 2008 to 103 in 2009;
approved settlements increased in total value by more than 35%, from $2.753 billion in 2008 to $3.830 billion in 2009;
the median settlement amount did not change from 2008 to 2009, remaining at $8 million;
the average settlement amount rose from 2008 levels of $28.4 million to $37.2 million in 2009;
the 2009 average settlement amount remains below the average of $55.4 million for settlements through 2008 (if the largest four settlements from 1996 to 2008 are removed from the calculation, the 2009 average settlement is higher than the adjusted $34.4 million average for the 1996 to 2008 period).

As to future projections, Cornerstone anticipates that settlement amounts are likely to increase as the cases brought in connection with the 2008 stock market decline and surrounding credit-crisis begin to settle.

UK: Law Commission Publishes Paper on Damages for Late Payment and the Insurer's Duty of Good Faith

Fri, 26 Mar 2010 11:38:00 GMT

The Law Commission has published an Issues Paper considering whether an insurer should be liable for loss caused as a result of its unjustified refusal to pay a claim. The paper suggests that the current position regarding an insurer's post-contractual duty of good faith be changed so that damages would be available where an insurer breaches its duties by refusing to pay out on time. At present, the only remedy for breaches of good faith is avoidance, which is often inadequate for an insured awaiting payment from its insurer for a loss suffered.

The Commission's Insurance Contract Law Issues Paper 6 refers to the decision in Sprung v Royal Insurance (UK) Ltd [1999] 1 Lloyd's Rep IR 111; [1997] CLC 70 to illustrate the unfairness of the current system. In that case, Mr Sprung lost his business after vandals damaged his factory but his insurer refused to pay out. Although four years later he eventually received an indemnity for damaged property plus simple interest and costs after the insurer abandoned its defence, he was not allowed to recover for the lost opportunity to sell his business. The Issues Paper refers to many criticisms of the case and points out that in Scotland damages for late payment is allowed because insurance is not considered an exception to normal contract rules.

The paper is aimed at promoting discussion before final proposals are formulated. Responses are requested by 24 June 2010. The full paper can be viewed by clicking here.

Utah Appoints Acting Insurance Commissioner

Fri, 26 Mar 2010 09:56:00 GMT

Neal T. Gooch has been appointed Acting Commissioner of the Utah Insurance Department ("UID"). Mr. Gooch replaces former Commissioner D. Kent Michie, who has retired after holding the position for five years. Mr. Gooch has served as Deputy Commissioner of the UID since 1997. Before joining the UID, Mr. Gooch held a number of posts at the Utah Attorney General’s office, including general counsel to the Utah Insurance Commissioner from 1986 to 1997. A native of Southeastern Idaho, Mr. Gooch earned his J.D. from Potomac School of Law in Washington, D.C.

NAIC to Move Forward with Insurer Climate Risk Disclosure Survey

Fri, 26 Mar 2010 09:52:00 GMT

We have reported previously on the NAIC's preparations to implement its Insurer Climate Risk Disclosure Survey (the "Survey") (click here for our last post).

On March 25, 2010, at the NAIC Spring 2010 National Meeting, the Climate Change and Global Warming Task Force (the "Task Force") re-opened discussions on the Survey. Commissioner Joel Ario (Pennsylvania), Chair of the Task Force, reported that there had been considerable debate, since adoption of the Survey, over whether the proposed approach was appropriate. Commissioner Ario invited a fresh discussion of whether the Survey should be carried out in its current form, or at all, opening the floor first to members of the Task Force and then to other interested parties in the room, including representatives from the Property Casualty Insurers Association of America, the Reinsurance Association of America, the National Association of Mutual Insurance Companies and the Rockefeller Family Fund, who expressed a wide range of views.

Following the discussion, Commissioner Ario proposed that the Survey should move forward as proposed. He noted that the State prerogative permits each State to choose whether or not to circulate the Survey. Commissioner Ario encouraged each State that circulates the survey to do so in un-amended form, so that there is consistency between the States. Commissioner Ario proposed that the position be reassessed at the NAIC's August 2010 National Meeting. Finally, Commissioner Ario noted that, given the delays in circulating the Survey, the original reporting date of May 1 may be pushed back.

Materials for the Climate Change and Global Warming Task Force can be found by clicking here.

If you have any questions about other developments at the NAIC Spring National Meeting, please contact EAPD's Alan Levin, Nick Pearson or Chris Sage, who are all in Denver through Sunday.

Senate Tees Up Financial Regulatory Reform Following Healthcare Victory

Thu, 25 Mar 2010 15:07:00 GMT

Top lawmakers met with President Obama Wednesday in order to regain momentum on financial regulatory reform legislation in Congress. Following the meeting, Senate Banking, Housing and Urban Affairs Chairman Christopher Dodd (D-CT) and House Financial Services Chairman Barney Frank (D-MA) expressed confidence that the Senate would soon act – perhaps by Memorial Day – on the financial reform bill that was approved by the Banking Committee on a party line vote on Monday.

As Congress wraps up work on healthcare reform efforts this week and heads into its two-week Easter recess, Chairman Frank stated that financial regulatory reform would be the top issue in the Senate when Congress reconvenes in mid-April. Despite Democrats’ newfound confidence following their recent success on healthcare reform, Chairman Dodd must continue negotiations with the minority party and win at least some support from Republicans in order to win approval on the Senate floor, given the majority party’s loss of their 60 vote filibuster-proof majority this winter. In that vein, the Chairman predicted that such support would materialize in the coming weeks, given some Republicans’ potential reluctance to oppose a politically popular reform effort.

Following Senate floor action on its financial reform bill, a conference committee would be necessary in order to iron out differences between it and the legislation passed by the House in 2009. To that end, Chairmen Dodd and Frank plan to begin working out such differences in the near future, in order to expedite conference proceedings. While both the House and Senate versions seek to tackle the same major issues – such as increased consumer protections, new derivatives trading rules and establishing rules to avoid future bailouts of failing financial firms – the devil is in the details.

Nevertheless, White House spokesman Robert Gibbs said Wednesday that “the President expects that we will finish financial reform in the next couple of months, certainly by the time we mark the second anniversary of the financial collapse in the early fall.”

As the legislative process moves forward on financial regulatory reform, we continue to monitor its progress and will provide updates on InsureReinsure.com.

EU: European Commission Adopts New Competition Block Exemption Regulation for the Insurance Sector

Wed, 24 Mar 2010 13:47:00 GMT

On 24 March 2010, the European Commission (the Commission) adopted its long-awaited new block exemption regulation for the insurance sector, which will come into force on 1 April 2010. Block exemptions are an instrument of European competition law that remove certain categories of agreement from the prohibition of anticompetitive agreements set out in Article 101 of the Treaty on the Functioning of the European Union (previously Article 81 EC Treaty).

Agreements caught by the prohibition in Article 101 are void and unenforceable. In the most serious cases, parties to an infringing agreement can be fined substantial sums or be sued by parties harmed by the agreement. While restrictive agreements falling outside a block exemption may still be exempt from the prohibition if they deliver specific economic benefits, being covered by a block exemption gives greater certainty over an agreement's legality and hence enforceability. However, the protection offered by a block exemption can come at a cost, in terms of loss of commercial flexibility, as the Commission tends to use such regulations to influence the terms of individual contracts, by tightly specifying the conditions under which the exemption is available.

The current insurance block exemption, which dates from 2003 and expires on 31 March 2010, exempts agreements relating to the compilation and exchange of statistical information for the calculation of risks; the creation and operation of insurance pools; the establishment of standard policy conditions; and specifications for security devices.

As anticipated by the draft regulation, published by the Commission on 5 October 2009 (see our previous blog here), the new regulation reduces the categories of agreements covered by the exemption from four to two.

Specifically, from 1 April the block exemption will only cover agreements relating to:

the joint compilation and exchange of information necessary for the calculation of the average cost of covering a specified risk in the past; the construction of tables relating to risks associated with death, illness, accident or invalidity; or joint studies relating to future risks or investment (Article 2); and
the creation and operation of co-insurance and co-reinsurance pools (Article 5).

Agreements relating to the establishment of standard policy conditions and to specifications for security devices will therefore no longer be block-exempted. Such agreements may nevertheless be individually exemptable, if countervailing benefits can be demonstrated. It is notable that the Commission plans to provide guidance on the assessment of such agreements when it publishes its new Guidelines on horizontal cooperation agreements. Of course, any such agreements may also fall outside the prohibition in Article 101 altogether, if they do not give rise to an appreciable restriction of competition in the first place.

The new regulation makes some other changes, including:

Two new conditions for exemption of information exchange agreements have been introduced: namely the information must not contain any indication of the level of commercial premiums and, subject to public security considerations, should be made available on affordable and equal terms to consumer and customer groups which request them 'in specific and precise terms for a duly justified reason'. In the draft regulation, insurance companies were required to make the information available to 'any interested party such as consumer organisations which requests a copy of them'. The final wording is substantially narrower than that originally proposed in the draft.
A number of changes have been introduced in relation to the application of the block exemption to insurance pools:

A new definition of pools clarifies that the block exemption does not cover ad-hoc co-insurance or co-reinsurance involving a leader and followers in the subscription market (potentially linked to concerns that the Commission expressed in its business insurance report over the operation of subscription markets).
The definition of 'new risks' has been widened to include any risk whose nature, objectively, has changed so materially that it is impossible to know in advance what subscription capacity is needed to cover the risk. Under the new regulation, an exemption is granted to pooling arrangements created for the co-insurance or co-reinsurance exclusively of new risks, for the first three years of their existence.
While the market share thresholds below which pools that have existed for over three years may benefit from the block exemption have remained the same, the Commission has changed the way in which the combined market share of the members of a pool is calculated. Under the current regime, only the combined market share within the pool was taken into account. From 1 April, members of a pool will need to consider their combined market share both inside and outside of the pool. In contrast with the draft regulation, the new regulation sets out precisely what this entails. Account must be taken of the market share of each member within the pool itself, the market share each member has within another pool on the same relevant market, and the market share held by each member on the same relevant market outside the pool.
There has been an increase in the market share bands which determine the grace period, during which the exemption continues to apply, applicable to members of a pool covering non-new risks whose aggregate market share has grown to exceed the maximum threshold.
Modifications have been made to two of the conditions for the exemption of pools. The notice to withdraw from a pool must be reasonable and is no longer restricted to a maximum of one year. Also the rules of the pool must not 'restrict any participating undertaking from insuring or re-insuring outside the pool'. The original wording in the draft regulation was the rules must not 'oblige any member of the pool not to insure or re-insure'. The new wording seems wider and will capture the more subtle arrangements to prevent members insuring or re-insuring outside the pool.
One of the conditions for the exemptions of pools under the current regulation will no longer apply. Under the new regulation, it will no longer be prohibited for a member of a pool or an undertaking with a determining influence over the commercial policy of the pool to also be a member of, or have a determining influence over the commercial policy of, another group active on the same relevant market.

Like under the current regime, the benefit of the new regulation may be withdrawn by the Commission, or a national competition authority, if an agreement to which the new regulation applies nevertheless has effects which are incompatible with Article 101. Recital 22 of the new regulation states that the anti-competitive effects that may derive from links between a pool and/or its members and other pools and/or their members on the same relevant market will be of particular importance in deciding whether to withdraw the benefit of the new regulation.

The new regulation, which will remain in force until 31 March 2017, is available by clicking here. It is accompanied by an explanatory communication from the Commission, which is available by clicking here.

Announcing the new regulation, Commission Vice-President for Competition Policy Joaquín Almunia noted that the Commission and national competition authorities "will see to it that the industry does not use the exemption as a blanket protection and will enforce competition rules where and whenever necessary." It is at least doubtful, however, that action would now be taken against agreements that previously benefited from a block exemption.

For further information please contact:

Becket McGrath
Partner, EU and Competition
Edwards Angell Palmer & Dodge UK LLP, London
bmcgrath@eapdlaw.com
+44 20 7556 4125

NAIC Announces Intent to Hold Hearing on Stranger Owned Annuities

Wed, 24 Mar 2010 07:46:00 GMT

The NAIC issued a press release (the “Release”) earlier this month announcing its intent to hold a public hearing on the emergence of stranger originated/owned annuity transactions (“STAT”). STATs are similar to stranger owned life insurance transactions (“STOLI”), which have been the subject of regulatory scrutiny for a number of years. STATs generally involve a senior or terminally ill person as the annuity measuring life, and are initiated by investors without an insurable interest in such measuring life. The investor (or “stranger”) pays the premiums on the annuity contract and usually provides some sort of additional payment or incentive to the measuring life for entering into the contract. The investor will then collect the benefits ultimately paid out, which usually include a death benefit.

According to the Release, the NAIC plans to examine the conditions of the evolving STAT marketplace. It will also determine whether new laws and regulations are necessary to protect consumers. The hearing will include industry representatives, state regulators and consumers. The date and location of the hearing have not yet been determined.

We will continue to monitor this topic and provide further updates on InsureReinsure.com.

Click here for a copy of the Release.

Hong Kong: Majority of Business Lines Show Gains in 2009

Wed, 24 Mar 2010 07:43:00 GMT

The Office of the Commissioner of Insurance in Hong Kong (the OCI) reported that the Hong Kong insurance market posted a total underwriting profit of HK$2.2 billion (US283.5 million) for 2009. This represents a 46.6% increase over 2008. Overall, the sector enjoyed growth in general insurance (gross premiums increased by 5.7% to HK$28.6 billion and net premiums by 7.1% to HK$20.5 billion compared with the previous year, although the overall business growth was offset by a fall in marine business and goods-in-transit business), and non linked individual life and annuity lines (business rose 11.3% to HK$91.2 billion in 2009). However, linked individual life and annuities saw significant drops (business fell 33.4% to HK$37.7 billion in 2009).

In addition, the OCI reported that in the reinsurance sector, gross and net premiums in 2009 increased by 7.2% and 10.9% respectively, to HK$5.8 billion and HK$3.5 billion.

A copy of the OCI's press release can be viewed by clicking here.

Brazilian Court Awards US$ 1.2 Million Award to Family of Air France Brazil Crash Victim -- Insurer Intends to Appeal

Tue, 23 Mar 2010 13:21:00 GMT

A Brazilian court recently awarded US$ 1.2 million to the family of a passenger on the Air France plane that crashed into the Atlantic Ocean off Brazil last year. Air France's insurers, led by AXA, reportedly intend to appeal the decision.

On June 1, 2009, Flight 447 from Rio de Janeiro to Paris crashed into the ocean. All 228 passengers and crew were killed. The cause of the crash has not yet been established because the plane’s black boxes are still missing. The search for the missing black boxes, which is entering its third phase at an expected cost of US$ 13.73 million, is expected to resume later this week.

Although the investigation is ongoing, a Brazilian court recently ordered Air France to pay a US$ 1.16 million award to the family of Marcelle Valpacos Fonseca Lima, who was a state attorney general at the time of her death. The judge concluded in his ruling that, while the cause of the crash remains unclear, it was largely due to the negligent conduct of Air France.

According to media reports, Air France's insurers, led by AXA, intend to appeal the decision. The insurers' position reportedly is that compensation for the victim’s families should not be decided by a court but by a specially-created committee of government officials, associations of victims’ families and insurers tasked with identifying criteria to determine fair compensation for each victim's family.

If you have any questions about the Brazilian court system or insurance coverage for aviation claims, please click the “Email the Editor” button and provide your contact information for follow-up by an EAPD attorney.

EU: EU-Wide Insurance Sector Stress Test Findings Published

Tue, 23 Mar 2010 10:37:00 GMT

The Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) has recently published the findings of its EU-wide stress test exercise for the insurance sector. To view the findings, please click here.

CEIOPS announced its intention to carry out the stress tests in October 2009. Please click here to view our previous blog on this issue. The stress tests were designed to provide EU policymakers with information to help them assess the insurance sector's resilience to financial shocks and to improve supervision. Participating insurance groups were asked to calculate the impact of stresses on their solvency ratios under three different scenarios: the first scenario was intended to reflect the developments in the capital markets between September 2008 and September 2009; the second scenario was intended to reflect a more severe and prolonged recession; and the third scenario was intended to reflect a sudden inflation.

The exercise included 28 large European insurance groups, representing approximately 60% of gross premiums of the European insurance sector. The results of the exercise indicate that the larger European insurance groups would remain resilient even in severe scenarios. In all the scenarios, the aggregated level of available capital exceeded the regulatory requirements. In the first scenario, the exercise resulted in a marginal impact of a loss of €10 billion, representing a 3% reduction in the available capital of the participating groups. The impact on available capital was considerably higher in the other two scenarios with a reduction of up to 25% of the available capital of the participating groups. However, in all three scenarios the participating insurance groups held assets sufficient to cover policyholder liabilities.

To view previous blogs relating to CEIOPS, please click here and here.

EU: Commissioner in Charge of Solvency II Confirms 2012 Implementation

Tue, 23 Mar 2010 10:31:00 GMT

It has been reported that Karel van Hulle, head of insurance and pensions at the European Commission, confirmed that Solvency II will come into force in October 2012. Speaking at an Insurance Institute of London lecture at Lloyd’s on 17 March 2010, he denied that there were sound reasons to push back the deadline. This contrasts with reports that a meeting had been scheduled to discuss delaying the implementation of Solvency II and is also at odds with calls from some senior industry figures, such as Thomas Steffen, head of Germany's insurance regulator, BaFin, for Solvency II to be delayed.

EAPD at NAIC and IAIR Spring 2010 Meetings

Mon, 22 Mar 2010 14:52:00 GMT

EAPD will be attending the National Association of Insurance Commissioners (NAIC) Spring 2010 National Meeting and the International Association of Insurance Receivers Spring 2010 Meeting in Denver, Colorado from Thursday, March 25 to Sunday, March 28.

Alan Levin and Nick Pearson, partners, will be attending together with Chris Sage, associate in EAPD's London office. Alan, Nick and Chris would be delighted to catch up with blog-readers at the event, either formally or informally. They can be contacted at ALevin@eapdlaw.com, NPearson@eapdlaw.com and CSage@eapdlaw.com.

Last Week in DC: The Healthcare Reform Debate – March 22, 2010

Mon, 22 Mar 2010 10:51:00 GMT

After another week of fine tuning and vote counting, House leaders released the final text of their healthcare bill on Thursday, in addition to official cost estimates from the Congressional Budget Office (CBO). These steps set the wheels in motion for a weekend vote on the measure, and after a frenzied race to secure the necessary 216 votes for passage, the House approved its final healthcare reform efforts in a historic Sunday night vote.

FINAL BILL UNVEILED:

Democrats introduced their reconciliation bill (H.R. 4872) on Thursday, following a week-long flurry of activity to tweak and finalize its provisions. As previously discussed, the reconciliation process gives the House the opportunity to make changes to the Senate-passed healthcare reform bill (H.R. 3590), without having to send H.R. 3590 back to the Senate for another vote – something Democratic leaders have needed to avoid now that they no longer hold the 60 vote supermajority needed to avoid a Republican led filibuster.

The CBO estimates that the legislation will cost $940 billion over 10 years, and will reduce the deficit by $138 billion during that same time period, and by an astonishing $1.2 trillion during the second decade. H.R. 4872 is expected to extend health insurance coverage to approximately 32 million individuals, amounting to coverage of up to 95 percent of the population.

As expected, the reconciliation measure strikes controversial Medicaid provisions in the Senate bill that would provide special treatment for individual states such as Nebraska, and would provide enhanced federal Medicaid payments to all states – including additional aid to states that have already expanded their coverage. H.R. 4872 also takes steps to close the so-called “donut hole” in the Medicare prescription drug benefit, and would mitigate the impact of the Senate bill’s excise tax on high-cost “Cadillac” health insurance plans.

Unrelated to health insurance, the reconciliation bill makes changes to the federal student loan program – a step that was also included in the Fiscal Year 2010 budget instructions that allowed for healthcare reform to be approved in this manner.

HOUSE APPROVES FINAL LEGISLATION:

Following the release of H.R. 4872, House leaders ramped up their efforts to secure the 216 votes necessary for passage of the reconciliation legislation. Democrats steadily picked up support throughout the week, but suffered setbacks as well, as several Representatives announced their opposition to the bill after having voted for the House’s initial healthcare reform efforts last fall.

Heading into the weekend, House Speaker Nancy Pelosi (D-CA) remained a handful of votes shy of victory, and President Obama again delayed his upcoming trip overseas in order to be in Washington, DC during the critical final hours leading up to the planned vote on H.R. 4872. Together, House leaders and the President worked in tandem to secure the final votes needed to push healthcare reform across the finish line.

Most notably, top Democrats spent time negotiating with the group of anti-abortion Members who voted in favor of the original House bill but who opposed the Senate bill due to its less robust abortion language. After early weekend talks appeared to end in a stalemate, the needed breakthrough was reached on Sunday when Congressman Bart Stupak (D-MI) – the anti-abortion block’s leader – announced that his group would support the final healthcare reform bills after President Obama agreed to issue an Executive Order explicitly ensuring that no taxpayer dollars would be used to fund abortions. This agreement gave healthcare reform its winning margin, as the House teed up both H.R. 3590 and H.R. 4872 for votes later that evening.

The hours leading up to Sunday’s landmark votes were filled with dramatic moments both in the House chamber and on the Capitol grounds. However, the House approved the Senate-passed healthcare bill just before 11:00 p.m. on Sunday evening by vote of 219-212, with 34 Democrats joining all 178 Republicans in opposition of the measure. Shortly thereafter, the House passed the package of fixes to the Senate bill – H.R. 4872 – by a similar vote of 220-211, with 33 Democrats joining the minority party in opposition.

NEXT STEPS:

Immediately following the House vote to approve the Senate’s healthcare bill, H.R. 3590 was sent to President Obama’s desk to be signed into law. Upon passage of the reconciliation legislation, H.R. 4872 was sent to the Senate for consideration, where it is protected from a filibuster and needs only a simple majority to pass, and where the Democratic majority has vowed to approve the bill expeditiously. Senate Republicans have made known they will try to use the complex procedural rules surrounding the reconciliation process to attempt to pare back or kill the legislation, but it is largely expected that such efforts will be dilatory at best and that the Senate will approve H.R. 4872 as early as this week, bringing Congress’ year-plus quest to enact healthcare reform to a close.

The Healthcare Reform Legislation ultimately adopted may affect many segments of the healthcare industry, including providers and suppliers, insurers, educational institutions, pharmaceutical and medical device companies, as well as employers and other constituencies within the healthcare industry at large. We will be releasing further advisories addressing the impact of the legislation on specific practice areas and industries when it becomes final.

Connecticut Federal Court Finds that Reinsurer Does Not Have to Follow Cedent’s Fortunes

Mon, 22 Mar 2010 10:47:00 GMT

Employers Reinsurance Company, now known as Westport Insurance Corporation (“Westport”), provided reinsurance coverage for insurance policies issued by Connecticut Specialty Insurance Company (the “Reinsurance Agreement”). Royal Surplus Lines Insurance Company, later known as Arrowood Surplus Lines Insurance Company (“Arrowood”), entered into an agreement by which it assumed Connecticut Specialty’s liabilities under certain policies, including a general liability policy issued to Equity Residential (the “Policy”).

A litigation arose between Arrowood and Equity concerning the Policy. Equity argued that the Policy had a three-year period and sought coverage for losses that occurred from December 15, 1999 to December 15, 2002. Arrowood, on the other hand, contended that the Policy only covered the first year of that period. Arrowood ultimately settled with Equity and sought reimbursement under the Reinsurance Agreement from Westport.

Westport agreed to indemnify Arrowood for losses occurring during the first year of the Policy, but asserted it had no liability for losses occurring thereafter on the grounds that such losses were not covered by the Reinsurance Agreement. Arrowood, however, claimed that its settlement payment and expenses were based, in part, on the risk that Equity might prevail in the litigation on its argument that the Policy had a three-year period. Thus, Arrowood contended that Westport was obligated to pay Arrowood in full under the follow the fortunes clause in the Reinsurance Agreement.

In granting Westport’s motion to dismiss on the pleadings, the court noted that the follow the fortunes doctrine only applies to losses that fall within the scope of the reinsurance contract. Specifically, the court noted that the Reinsurance Agreement contained language limiting its coverage to a year at a time, regardless of the length of the underlying insurance policy. In this case, Westport terminated the Reinsurance Agreement on August 18, 2000, and thus all losses incurred after the anniversary date the Policy (December 15, 2000) were not covered. For this reason, the court held that Westport was only obligated to indemnify Arrowood for any liability incurred before that date.

Click here to review a copy of the District Court’s decision, captioned Arrowood Surplus Lines Ins. Co. v. Westport Ins. Corp., No. 08-cv-1393 (D. Conn. 2010).

Webinar - Intellectual Property Issues for the Insurance Industry: An International Perspective

Fri, 19 Mar 2010 15:41:00 GMT

The Intellectual Property Group of Edwards Angell Palmer & Dodge is holding a 60 minute complimentary webinar entitled "Intellectual Property Issues for the Insurance Industry: An International Prospective" on Tuesday, March 30, 2010 at 12:00 p.m. EST.

This topical webinar will address the important issues surrounding patents and trade marks affecting the insurance industry. These issues will be examined from both a US and non-US (European) perspective.

For further information on content and speakers, please click here. To register online for this webinar, please click here.

Client Advisory - President Signs HIRE Act - Allows Direct Subsidies for Issuers of Certain Qualified Tax Credit Bonds

Fri, 19 Mar 2010 12:13:00 GMT

On Thursday, March 18, 2010, the President signed into law the Hiring Incentives to Restore Employment Act (the "HIRE Act"), which, among other things, changes the rules for issuers of certain Qualified Tax Credit Bonds (QTCBs) described in Section 54A of the Internal Revenue Code (Code). The HIRE Act allows issuers of certain QTCBs to receive direct subsidy payments, not unlike those already available to issuers of Build America Bonds (BABs) and Recovery Zone Economic Development Bonds. The HIRE Act permits these QTCB issuers to elect to receive the new direct subsidy payments, or to forego the direct subsidy payments and to permit holders of these QTCBs to receive tax credits as provided prior to passage of the HIRE Act. Please click here to read more.

Wachovia To Pay $160 Million To Settle Mexican Money-Laundering Controls Charges

Thu, 18 Mar 2010 11:42:00 GMT

Wachovia, now a subsidiary of Wells Fargo & Co., has agreed to pay federal authorities $160 million to resolve allegation that the bank failed to maintain proper anti-money-laundering controls, thereby allowing billions of dollars of drug proceeds to pass through the bank between 2003 and 2008. According to federal officials, the transfers between the bank and Mexican currency exchange houses, commonly known as “casas de cambio,” allowed drug cartels to launder money and purchase boats and airplanes with drugs proceeds. Wachovia entered into a deferred prosecution agreement with the United States Department of Justice that requires Wachovia to pay a fine of $160 million within five days and to implement controls that fully comply with the Bank Secrecy Act. The $160 million fine is comprised of $110 million in forfeited proceeds from the various transactions and a $50 million fine to the U.S. Treasury.

A copy of the deferred prosecution agreement can be found here.

UK: Third Party (Rights Against Insurers) Bill

Thu, 18 Mar 2010 09:01:00 GMT

As previously reported here, the Third Parties (Rights Against Insurers) Bill was introduced into Parliament in November 2009. It is designed, in particular, to remedy the shortcomings of current legislation in protecting the rights of third party claimants against insurers of the liabilities of insolvent defendants.

The Bill completed its passage through the House of Lords on 1 March 2010 and continues to progress through the House of Commons. Following its Second Reading in the Commons on 10 March 2010, it was considered by a Public Bill Committee on 16 March 2010. The Committee will report back to the Commons on a date as yet to be confirmed. We will report here on any further developments in the passage of the Bill.

Newsflash from the World Insurance Forum

Thu, 18 Mar 2010 08:58:00 GMT

In his remarks Monday, March 15, 2010, at the World Insurance Forum in Bermuda, Jeremy Cox, Chief Executive Officer of the Bermuda Monetary Authority (BMA), announced that, during a break at the Forum, CEO Cox and Dr. Monica Mächler, Vice Chair of the Board of Directors of the Swiss Financial Market Supervisory Authority (FINMA), executed a Memorandum of Understanding (MoU) between the BMA and FINMA. The MoU establishes a formal basis for consultation, cooperation and coordination. As we reported here and here, the BMA has previously entered into MoUs with New York and Luxembourg insurance regulators.

UK: Minster Scheme of Arrangement Sanctioned by High Court

Thu, 18 Mar 2010 08:55:00 GMT

The Insurance Insider yesterday reported that the High Court had sanctioned Minster Insurance's solvent scheme of arrangement, after the creditors approved the scheme at a meeting held on 18 January 2010.

The sanctioning of this scheme, which is the first to come before the English courts since the Scottish Lion scheme faced problems in the Scottish Courts (see our previous blogs here and here), will provide comfort to those who feared that the continued use of solvent schemes of arrangement was under threat.

California Fingerprint Requirement Updated as of March 1, 2010

Thu, 18 Mar 2010 08:52:00 GMT

The California Department of Insurance no longer requires fingerprints from non-resident individuals that have been fingerprinted in their resident state in connection with applying for an insurance producer license. The change was effective March 1, 2010. This exemption currently applies to individuals who currently hold a resident license in the following states: Alaska, Arizona, Connecticut, Florida, Georgia, Idaho, Louisiana, Montana, New Jersey, Nevada, Ohio, Oregon, Pennsylvania, Tennessee, Texas, Utah and Washington. This list of states will be updated as other states implement fingerprinting requirements.

The exemption does not apply to non-resident individuals who were licensed in their resident state prior to the resident state's adoption of a fingerprint requirement.

Click here to view the official press release.

RESCHEDULED: Re Under 40s Next Event -- "Preserving Liquid Assets" Lecture and Wine Tasting Now on April 1

Thu, 18 Mar 2010 08:21:00 GMT

Join the U.S. Reinsurance Under 40s Group on April 1 for "Preserving Liquid Assets" Lecture and Wine Tasting at the offices of Edwards Angell Palmer & Dodge in New York. The event will include an engaging lecture by Katja Zigerlig, AVP, Fine Art, Wine & Jewelry Insurance of Chartis Private Client Group, and a tasting of Spanish red wines. Ms. Zigerling will discuss the key components of investment wine's value - the grapes, key regions and marketplace for investment grade wines, and she will address the unique perils affecting the value and condition of wine and the cornerstones of preserving wine assets through inventory management, appropriate storage and a risk management plan.

This event was originally scheduled for February 10 but was rescheduled because of weather conditions.

For more information about the event, click here.

Please send an email with your contact information to events@reunder40s.org so the Re Under 40s reserve a spot for you at the event. See you there.

Labor & Employment - Winter 2010 Bulletin

Wed, 17 Mar 2010 15:21:00 GMT

Edwards Angell Palmer & Dodge is pleased to provide the following Winter 2010 - Labor & Employment Bulletin. We regularly provide information on legal issues important to today's business needs. Links to the publication and the individual articles in the bulletin are below. If you would like to see other publications, please visit our Newsstand.

In this Issue:

So, You're Thinking About Jumping Ship ... How Departing Executives and Employers Can Minimize their Risks

Non-Employees Gain Important Protections in New Jersey

March 1, 2010: Massachusetts Security Regulation Affecting All Companies with Personal Information of Massachusetts Residents

Ninth Circuit Holds that ADA Retaliation Claim Does Not Warrant Compensatory and Punitive Damages

Legal Updates

If you have any questions or feedback, please feel free to contact us at ContactUs@eapdlaw.com.

UK: Joint Discussion Paper on Consumer Complaints Published

Tue, 16 Mar 2010 12:41:00 GMT

The Financial Services Authority (FSA), the Financial Ombudsman Service (FOS) and the Office of Fair Trading (OFT) have jointly published a discussion paper entitled "Consumer complaints (emerging risks and mass claims) (DP10/1)". To view the discussion paper and press release, please click here and here.

The discussion paper considers, among other things, fair consumer redress, fair complaint handling by firms, emerging risks and mass claims.

A key proposal in the discussion paper is the creation of a joint coordination committee, consisting of representatives from the FSA, the FOS and the OFT. The committee's main role is to increase consumer protection by coordinating analysis of new and emerging risks and mass claims, and to determine effective ways of dealing with them.

The discussion paper also seeks views on a number of other issues including:

the scope for improvements to the FSA's complaints handling rules (Chapter 1 of the Dispute Resolution: Complaints sourcebook) and to the exchange and use of information between the FSA, the OFT and the FOS.
how firms can be encouraged to proactively deal with new and emerging risks before they turn into widespread issues.
how mass claims can be identified and addressed more effectively.

The period for responses to the discussion paper closes on 10 June 2010.

UK: FSA Update on PPI Reforms

Tue, 16 Mar 2010 12:38:00 GMT

On 9 March 2010, the Financial Services Authority (FSA) published feedback on its consultation assessing the Payment Protection Insurance (PPI) market (the First PPI Consultation).

The First PPI Consultation was published in September 2009 (see our blog here) and set out proposals to protect consumers in the PPI market to ensure that they are better treated when buying PPI or complaining about it. Among the proposals was guidance setting out standards of redress where a complaint relating to the sale of PPI is upheld. Particular detail was provided on the redress of complaints relating to the sale of single premium policies, where, for appropriate cases, the FSA proposed that comparison is made to an alternative regular premium policy that the consumer would have needed, wanted and been prepared to buy at the time (known as the "comparative approach" to redress).

Following responses received from stakeholders on the First PPI Consultation, the FSA issued a new consultation on 9 March 2010 with the feedback received on the First PPI Consultation and set out revised proposals (Second PPI Consultation). Among the changes to the original proposals, the FSA has:

increased the proposed referent regular premium price for all firms to use when assessing redress under the comparative approach;
set out a menu of different ways in which firms can implement the comparative approach; and
given the industry more time to implement the measures.

The FSA's press release can be found by clicking here.

The Second PPI Consulation can be found by clicking here.

EU: European Commission Starts Review of the Insurance Mediation Directive Including Conflicts of Interest and Transparency

Mon, 15 Mar 2010 11:26:00 GMT

As a first step in the European Commission's delayed review of the Insurance Mediation Directive (the Directive) the Commission has written to the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) requesting technical advice on revisions to the Directive to improve its functioning.

The aim of the review is to remove obstacles to the functioning of the single market for insurance and reinsurance intermediaries by removing member states' "gold plating" of implementation requirements and the different national requirements applied under "general good" provisions.

The Commission has asked CEIOPS for technical advice on the following issues:

Legal framework. Whether the IMD should be a Lamfalussy directive (following the four stage Lamfalussy process of implementation).
Scope. Whether a distinction should be drawn between investments packaged as life insurance policies and other general insurance products and how a level playing field should be created for all parties involved in the sale of insurance products.
Third country insurance intermediaries. The Commission wishes to improve legal certainty relating to services provided by insurance intermediaries established outside the EEA.
Professional requirements. The Commission is considering harmonising requirements across the EU on the knowledge and ability of individuals selling insurance including professional qualifications.
Cross-border issues. The Commission wishes to improve the current notification system applicable to the sale of insurance on a cross border basis including the imposition by host states of "general good" requirements and to integrate certain provisions of the Luxembourg Protocol relating to the cooperation of national supervisors into the revised Directive.
Conflicts of interest and transparency. For insurance policies that are not packaged retail investment products, the Commission intends to introduce greater transparency on the remuneration of intermediaries and mechanisms to ensure management of conflicts of interest. As a consequence mandatory Commission disclosure may replace the existing FSA requirement for disclosure if requested by a commercial customer and the UK voluntary industry guidelines (which have been confirmed by the FSA).
Administrative burden. The Commission wishes to identify ways to reduce the administrative burden of implementing the IMD and conduct a cost benefit analysis of the regime.

CEIOPS is due to provide its initial advice to the Commission by the summer of 2010. For full details of the request click here.

Last Week in DC: The Healthcare Reform Debate – March 15, 2010

Mon, 15 Mar 2010 09:28:00 GMT

Healthcare negotiations steadily moved forward last week, as details emerged on a potential timeline for completing action on a final bill in the coming weeks. Despite optimistic endgame statements from Democratic leaders on both sides of the Capitol, legislative language remained in the final stages of negotiations by the week’s end, as leaders continued to count votes and await final cost estimates.

ENDGAME TIMELINE EMERGES:

As high level negotiations progressed throughout the week, a tentative timeline to get healthcare reform legislation across the finish line was made public on Thursday. According to plans, the House Budget Committee will begin action today, approving changes to the Senate healthcare reform bill (H.R. 3590) by way of the budget reconciliation process. These corrections will largely follow the outline put forth by President Obama in late February. From there, the House Rules Committee would convene on March 16 or 17, in order to set the rules for debate on both H.R. 3590 and the reconciliation bill. Once rules are in place, the two measures could reach the House floor simultaneously as early as the end of the week, according to House leaders.

Upon House passage of both bills, H.R. 3590 would then be cleared for the President’s signature, as no changes would be made to the legislation that the Senate previously approved in late 2009. The reconciliation bill – which will contain the corrections to H.R. 3590 necessary in order for House Democrats to agree to its passage – would then move to the Senate, where the procedural rules governing the complex reconciliation process will protect the measure from a filibuster and allow for only 51 votes for final approval.

POTENTIAL COMPLICATIONS:

The aforementioned timeline and endgame strategy is not without a host of potential complications – scenarios that House and Senate leaders spent the week working to resolve.

Knowing that Republicans have stated that they intend to use a variety of procedural steps to stop the reconciliation measure once it makes its way to the Senate has caused ongoing concern among House Democrats that the House could take a difficult vote on healthcare reform only to have the bill languish in the upper chamber. As a result, House leaders are considering a strategy in which their Members may not have to vote directly on the Senate bill they do not wholly support, by crafting the final legislation in such a way that it would "deem" the Senate bill passed once the House approves the reconciliation package of corrections.

In addition to procedural concerns, House leaders must also contend with the belief that although Speaker Pelosi is close to securing the votes needed pass a final healthcare effort in the House, she has yet to clear the necessary 216 vote hurdle, namely due to lingering concerns over the issue of federal funding for abortion.

When the House cleared its original healthcare reform bill in November 2009, a group of anti-abortion Democrats succeeded in adding airtight restrictions to ensure that no federal dollars go toward the coverage of abortion services. By contrast, the Senate bill’s abortion funding prohibition language is less restrictive, and at least several House Democrats have indicated that they may withhold their votes should that language not be tightened. Complicating matters are the rules that bar any non-budget related items from being addressed in a reconciliation bill – a restriction that would likely include abortion language.

By the week’s end, House leaders appeared ready to move forward without resolving the controversial issue, expressing optimism that they would ultimately have enough votes to pass a final bill without tightening the Senate bill’s less restrictive abortion provisions.

NEXT STEPS:

Though noncommittal on an exact timeline, Speaker Pelosi has made clear to her caucus that a final healthcare vote could occur as early as this week, and has asked that Members clear their schedules through the weekend in order to move the Administration’s top domestic priority across the finish line. In addition, President Obama has postponed his upcoming trip to Asia until March 21 in order to continue his push for healthcare reform – another sign that the House may act this week.

The exact procedural strategy that will be employed remains under final negotiation, and we continue to closely monitor this fluid process as it nears its long awaited conclusion.

The Healthcare Reform Legislation ultimately adopted may affect many segments of the healthcare industry, including providers and suppliers, insurers, educational institutions, pharmaceutical and medical device companies, as well as employers and other constituencies within the healthcare industry at large. We will be releasing further advisories addressing the impact of the legislation on specific practice areas and industries when it becomes final.

Latin America’s Most Expensive Insured Event Ever? Compliance and Coverage Issues Begin to Emerge as Reinsurers Continue to Estimate Impact of Chile Earthquake

Mon, 15 Mar 2010 08:17:00 GMT

Even if the insured losses from the Chile earthquake fall in the mid-range of current estimates of between US$ 2 billion and US$ 8 billion, it will outpace Hurricane Wilma as the most expensive insured event in Latin America’s history, according to a release by reinsurance broker Cooper Gay.

Individual companies have also continued to release estimates of their exposure to the earthquake: Flagstone Reinsurance Holdings (US$ 50 million); Max Capital Group, Ltd. (US $10 to 20 million for both the earthquake and Xynthia), Platinum Underwriters Holdings (US$ 85 million from Q1 catastrophes), Validus (US$ 170 million to 270 million from Chile), Hiscox (US$ 100 million from Chile and Xynthia). Swiss Re and Munich Re had previously released estimates for exposure to the Chilean earthquake that combined to total over US$ 1 billion.

Some compliance and coverage issues have also begun to emerge from Chile as investigation of losses progresses: (1) Chilean law requires that losses be investigated and estimated by companies or local registered “liquidators” – any performance of duties reserved for such licensed professionals by foreign adjusters may pose regulatory compliance issues; (2) verification of entitlement to the expanded claim notice period agreed-to by local insurers for insureds impacted in particular ways by the earthquake; (3) potential conflicts (and ramifications thereof) between local insurers’ obligations to their insureds under local law and policies and their duties of cooperation/claims control under reinsurance agreements; (4) difficulties adjusting business interruption claims that in some instances will dwarf property damage; (5) detection of earthquake claims by insureds with no such optional coverage under their fire insurance policies; and (6) potential coverage/rescission issues posed by failure to build up to local code.

If you would be interested in learning more about the Chilean claims process or regulatory scheme, further discussing the evolving situation in Chile following the earthquake and/or receiving recommendations for local counsel and other professionals to assist on the ground in Chile, please feel free to contact EAPD attorney Machua Millett at mmillett@eapdlaw.com.

HK: Rising Demand for Yuan Policies

Fri, 12 Mar 2010 10:29:00 GMT

Chan Kin-por, legislator representing the insurance sector in Hong Kong's Legislative Council, recently told the South China Morning Post that many customers and insurance agents have urged him to seek a regulatory change to help the launch of yuan-denominated policies as many people believe that the yuan will appreciate in value over the next few decades and yuan life insurance policies may bring policyholders 20% to 50% growth in terms of investment returns and valuation gains. Yuan policies would allow premiums to be paid in yuan and benefits to be paid out in the same currency.

Chan said that the key hurdle is the current rules governing matching assets and liabilities. As the yuan is not a freely convertible currency, it would be very difficult for Hong Kong insurers to demonstrate to the Insurance Authority that they had enough yuan on hand to pay out any compensation and to ensure smooth yuan settlement.

Current Chinese mainland rules do not yet allow insurance companies to open or maintain yuan accounts with banks in Hong Kong as banks in the Special Administrative Region can only offer yuan accounts for individuals and seven industries which have retail exposure to yuan. Furthermore, due to the lack of yuan-denominated bonds and shares trading in the Hong Kong market, companies issuing yuan policies would find it hard to invest the premiums in yuan instruments.

At present, only Chinese mainland-backed Bank of China Group Insurance Co Ltd and China Life Insurance (Overseas) Co Ltd have launched a handful of yuan policies in Hong Kong.

Commissioner of Insurance in Hong Kong, Annie Choi Suk-han, said the regulator is closely monitoring the desire of local insurance companies to issue insurance policies in yuan.

China: Insurance Market Performance in 2009

Fri, 12 Mar 2010 10:28:00 GMT

According to the Statistics on China Insurance Business for 2009 recently published by the China Insurance Regulatory Commission (CIRC), total insurance premiums in China received in 2009 amounted to RMB 1.11 trillion, up 13.8% from 2008.

In particular, statistics show that property insurance premiums increased by 23.1% to RMB 287.58 billion and life insurance premiums increased by 12% to RMB 745.74 billion, compared with 2008. However, health insurance premiums saw a slight decrease from 58.55 billion to RMB 57.40 billion.

Statistics also show that total insurance payout in 2009 amounted to RMB 312.55 billion, an increase of 5.2% over 2008.

In addition, according to the CIRC’s records, the total value of assets held by insurance companies in China as at the end of 2009 amounted to approximately RMB 4.06 trillion, an increase of 21.6% over 2008.

EU: Further Delays for Solvency II Implementation; No Exemptions for the Legacy Industry

Thu, 11 Mar 2010 12:29:00 GMT

The head of the Insurance and Pensions Unit at the European Commission, Karel Van Hulle, confirmed that a meeting had been scheduled in early May to discuss extending the current October 2012 implementation deadline for the Solvency II regulatory regime to 1 January 2013. It is thought that moving the deadline to January 2013 would also make more sense from a prior-year reporting perspective.

Van Hulle, who is the commissioner responsible for delivering the new directive, also denied that the legacy industry would be exempted from the high capital requirements it is believed the Solvency II regime would impose. The decision could be viewed as a significant disappointment for the run-off industry, which may struggle to meet the capital requirements necessary under the new regime.

Chile: Foreign Reinsurers Announce Earthquake Loss Estimates as Industry Sectors Survey Damage

Thu, 11 Mar 2010 12:22:00 GMT

Foreign reinsurers are beginning to count the cost of the earthquake in Chile last month, with announced loss estimates already surpassing $1.5 billion. Total losses from the magnitude 8.8 earthquake are expected to be between $4 billion and $7 billion, although some estimates range as high as $10 billion.

Those reinsurers that have already announced loss estimates include Swiss Re, which is forecasting a $500 million impact, and Partner Re, which has said it expects pre-tax claims of between $220 million to $320 million. Transatlantic Re has said it expects to incur net catastrophe costs this quarter of between $60 million and $90 million (comprised of the Chile earthquake and Winter Storm Xynthia), while Munich Re forecasts gross claims of around $540 million from the quake. Finally, Bermuda-based reinsurer Everest Re has said its net exposure to the Chile earthquake is estimated at $225 million.

In terms of losses by industry, according to a study by catastrophe modeling company Eqecat, an estimated 20% of Chile's fruit production has been lost and 25% of the fishing industry installed capacity has been left unusable (the fishing industry is expected to take a year to recover). Chile's prominent wine industry has lost at least $250 million, mostly in damaged wine and packaging, while the full extent of damage to the wine industry's infrastructure is not yet known. Other affected industries include cellulose production and steel, with the Huachipato steel plant being particularly badly hit. Chile's large copper mining industry was temporarily halted because of power failures, but production resumed shortly after the earthquake.

Infrastructure damage was also extensive. Electricity services are still being restored and tsunamis destroyed installations at several ports in southern Chile. The Chilean government estimates that port repairs will cost more than $100 million. The 116,000 bpd Bio Bio oil refinery was also hit by the quake and is not expected to restart for at least a month.

If you would be interested in learning more about the Chilean (re)insurance markets and/or regulatory environments, or the evolving situation in Chile following the earthquake, please click the “Email the Editor” button and provide your contact information for follow-up by an EAPD attorney.

Senate Financial Reform Bill to be Unveiled Monday; Bipartisan Negotiations Fall Apart

Thu, 11 Mar 2010 11:40:00 GMT

Senate Banking, Housing and Urban Affairs Committee Chairman Christopher Dodd (D-CT) announced Thursday morning that he will release his updated financial regulatory reform bill on Monday. While citing “significant progress” and indicating that many sticking points had been resolved, Chairman Dodd also acknowledged that “a few outstanding issues remain.”

His statement effectively ended the ongoing bipartisan negotiations with Senator Bob Corker (R-TN) that were held over the past month in hopes of ending an impasse over the legislation’s most controversial issue – the structure and location of a consumer financial protection entity.

Instead, Chairman Dodd will move forward on his own, by formally unveiling financial reform legislation on Monday and by scheduling a mark up of the proposal for the week of March 22 – the week before Congress breaks for its two-week spring recess. The Chairman stated that it had been his goal to produce legislation based on a bipartisan agreement, but that he had “reached a point where bringing the bill to the full committee is the best course of action to achieve that end.”

Chairman Dodd’s announcement has further fueled skepticism over whether the Senate will be able to pass a financial regulatory reform bill this year, given that at least some Republican support will be necessary now that Democrats no longer hold a filibuster-proof majority in the Senate. Nonetheless, we continue to monitor progress on this complex legislative issue and will provide updates on InsureReinsure.com.

Netherlands: New Research Shows Vaccine May Help Mesothelioma Victims

Wed, 10 Mar 2010 08:56:00 GMT

Research carried out by a team at the Erasmus Medical Centre in the Netherlands on ten people with malignant mesothelioma has shown that a vaccine may aid victims of the disease. In simple terms, the researchers created a specific vaccine for each patient by exposing the patient's own dendritic cells (a type of immune cell) with antigen from the patient's own tumour. The resulting vaccine produced a significant increase in the patient's antibodies. The research is due to be published in the American Journal of Respiratory and Critical Care Medicine although the article can be accessed on its website now.

Mesothelioma is a type of asbestos-related lung disease. Although it can take 50 years to develop following asbestos exposure, the disease usually kills its victim within 12 to 18 months of diagnosis. There is no known cure.

Florida Supreme Court Considering Question of Rental Car Company Vicarious Liability

Tue, 09 Mar 2010 14:03:00 GMT

On March 1, 2010, the Florida Supreme Court heard oral argument in Rafael Vargas v. Enterprise Leasing Company, et al., SC08-2269. The case challenges the application of a federal law that shields rental car companies from vicarious liability for accidents involving rental cars. The 2005 federal “Graves Amendment” protects rental car companies from such liability except in states which impose financial responsibility or insurance requirements on rental car companies.

In the Vargas case, the issue is whether a Florida law, entitled “Financial Responsibility,” meets the federal exemption criteria, thereby rendering the protections of the Graves Amendment inapplicable. Under Florida law, if the person who leases or drives a rented vehicle is uninsured or has combined insurance limits of less than $500,000, the rental company “shall be liable for up to an additional $500,000 in economic damages.”

Vargas was injured when a vehicle rented from Enterprise rear-ended his car in February 2006. Vargas subsequently made a vicarious liability claim against Enterprise, which the trial court rejected. Florida’s Fourth District Court of Appeal agreed with Enterprise Leasing Company, holding stated that the Florida statute did not fit within the exemptions to the Graves Amendment. The Florida Supreme Court will now resolve the issue.

For more information see here.

Chinese Drywall – First Bellwether Trial Ongoing

Tue, 09 Mar 2010 13:58:00 GMT

The first federal trial in the nationwide Chinese drywall controversy began on February 19th, 2010 in New Orleans and is ongoing. This “bellwether” trial involves seven Virginia plaintiffs whose homes contain drywall manufactured by China-based Taishan Gypsum Co.

As previously reported, all federal Chinese Drywall products liability actions have been consolidated in the United States District Court for the Eastern District of Louisiana as part of the Chinese Manufactured Drywall Multi-District Litigation (“MDL”).

Consult www.insureinsure.com for further updates on the Chinese Drywall bellwether trials.

For further information see here.

Contingent Commissions Allowed for “Big Three” Insurance Brokers in New York, Illinois and Connecticut

Mon, 08 Mar 2010 13:43:00 GMT

Insurance regulators in New York, Illinois and Connecticut have reached an agreement to allow Aon Corp., Marsh & McLennan Companies Inc. and Willis Group Holdings plc (the “Big Three”) to receive contingent commission compensation from insurance carriers. As a condition to this new agreement, the Big Three have agreed to abide by the new producer compensation disclosure regulation proposed by the New York Insurance Department (the “Department”) in all U.S. jurisdictions.

The new agreement with the Big Three ends the prohibition established under the 2005 settlements that barred them from accepting contingent commissions from insurance companies. The 2005 settlements were the result of several investigations led by former New York Attorney General Eliot Spitzer into anti-competitive behavior involving bid rigging and the payment of hidden commissions. In addition, under the new agreement, the Big Three will have to maintain their compliance programs that ensure there will be no repeat of the issues that gave rise to the 2005 settlements.

The Department’s new producer compensation disclosure regulation, currently adopted for January 1, 2011 implementation, requires agents and brokers to describe their role in an insurance transaction (i.e., who they represent) and how they are compensated. If an insured or prospective insured request further information, the agent or broker will have to provide a response within a certain time period.

For unrelated reasons, the Department’s new producer compensation disclosure regulation has been strongly opposed by several New York insurance industry trade groups as either not going far enough to protect consumers or going too far in creating undue burdens on insurance producers.

Proponents of the new agreement between regulators and the Big Three are satisfied that the former Spitzer era settlements, which created an unfair playing field between those who could accept contingent commissions and those who could not, have been rolled back. Detractors of the new agreement are displeased that the 2005 settlements did not result in a further reduction of the use of contingent commission, which they allege cause a conflict of interest between how insurance producers are compensated and the interests of insurance consumers.

New York Insurance Exchange Considering Requesting Lower Federal Tax Rate

Mon, 08 Mar 2010 09:22:00 GMT

This updates our February 10, 2010 posting.

According to media reports, New York Insurance Department (the “Department”) Superintendent James Wrynn announced at a membership meeting of the Association of Insurance & Reinsurance Run-Off Companies (AIRROC) that the Department’s tax working group is reviewing whether a revived New York Insurance Exchange (the “Exchange”) should request a lower federal corporate tax rate. The current federal corporate tax rate is approximately 35%. Superintendent Wrynn stated that the Exchange may seek a lower federal corporate tax rate in order to be competitive with London, Ireland and Bermuda, whose corporate tax rates are 28%, 12.5% and 0%, respectively.

In his comments, Superintendent Wrynn also noted, “As much as I'd like to see something come about as a result of all of our efforts, if in the end it turns out that there is no real need in the industry for this type of facility [the Exchange] at this time, we're ready to fold up our tent and move on.”

We will continue to monitor these developments and provide updates at InsureReinsure.com.

Last Week in DC: The Healthcare Reform Debate – March 8, 2010

Mon, 08 Mar 2010 09:15:00 GMT

Democrats moved steadily forward last week on their reinvigorated efforts to enact comprehensive healthcare reform, as the White House specified its procedural preferences and Congressional leaders continued to hammer out policy provisions. However, given the various complications that stand in their way, it remains to be seen whether Democrats will be able to finalize legislation before the end of the month – their new self-imposed deadline.

PRESIDENT OBAMA ENDORSES USE OF RECONCILIATION:

On Wednesday, President Obama urged Congress to complete work on healthcare reform and deliver a final bill to his desk “in the next few weeks,” and that a reform bill deserves an “up or down vote.”

While never mentioned specifically by name, the President’s comments were an implicit endorsement of the use of the budget reconciliation process as a means to get a final bill across the finish line. This subtle endorsement gave Congress the green light to move forward on a two-pronged strategy that has been under consideration since the January special election in Massachusetts stripped Senate Democrats of their 60 vote supermajority.

Under this strategy, the House would pass the Senate’s already-approved healthcare legislation (H.R. 3590) without any changes, negating any need for another trip to the Senate that would require 60 votes for passage, and sending the bill directly to President Obama’s desk. House and Senate Democrats would then turn to a negotiated package of fixes to H.R. 3590, in order to alleviate the concerns that many House Democrats have stated they have with the legislation in its current form. This corrections package would move through Congress via budget reconciliation – a complex procedural process that would protect the measure from a filibuster in the Senate and allow for passage with only 51 votes.

CONGRESS PREPARES FINAL BILL & SETS TIMELINE:

House and Senate leaders have already begun work on a corrections bill based on the proposal put forth by the White House two weeks ago in advance of its healthcare summit, and have indicated that such work could be completed in the coming days. Once legislative language is finalized, the bill would then be sent to the Congressional Budget Office (CBO) for official cost estimates – a process that could take about a week to complete.

In order to mollify House Democrats’ concerns, it is expected that the corrections package will include Medicaid equality and expansion provisions, language to close the Medicare prescription drug coverage “donut hole”, additional federal assistance provisions to help low and middle income families afford insurance, and language to delay and weaken the proposed excise tax on so-called “Cadillac” healthcare plans.

On Thursday, House Majority Leader Steny Hoyer (D-MD) stated that he expects the House to move on final healthcare legislation by the time Congress adjourns for a two-week Easter recess, currently set to begin on Friday, March 26. This ambitious timeline meets President Obama’s expectations, though it is not without a host of potential roadblocks.

First, House Speaker Nancy Pelosi (D-CA) must secure the necessary 217 votes from within a Democratic caucus in which individuals and factions are already expressing skepticism and threatening to withhold their votes. Many moderate Democrats who opposed the original House bill last November for fiscal reasons have given no indication that they will change their votes, while at the same time, pro-life Democrats who supported the House bill after a stringent anti-abortion clause was added are threatening to oppose a corrections package should the more lenient abortion language in the Senate bill remain unchanged.

Once again, Speaker Pelosi finds herself in a delicate balancing act in which she cannot afford to lose a single Democratic vote, and she has indicated that she will not have a firm head count until the corrections package is finalized and scored by CBO.

In addition to specific policy concerns, House Democrats have expressed concerns over the complicated and risky process now necessary in order to enact healthcare reform legislation. Many Democrats – particularly those facing tough reelection battles in November – do not want to take another difficult vote on healthcare only to see the reconciliation process get tied up in the Senate due to numerous potential procedural difficulties. As a result, House and Senate leaders are discussing the possibility of getting 51 Democratic Senators to commit – in writing – to passing the corrections bill, in addition to other scenarios that would provide similar security.

Further complicating matters is the seemingly unanimous Republican opposition that was solidified following the recent White House healthcare summit.

NEXT STEPS:

The next several weeks will determine the fate of comprehensive healthcare reform efforts. Should Democrats fail to enact legislation by Easter, it will be increasingly difficult to maintain momentum in the debate, as many rank and file Members will push to re-focus efforts on job creation in the months leading up to this year’s pivotal midterm elections. As previously noted, the complex legislative process necessary to push President Obama’s top domestic priority across the finish line consists of many moving parts and unpredictable factors, and we will continue to closely follow this fluid situation and provide relevant updates.

The Healthcare Reform Legislation ultimately adopted may affect many segments of the healthcare industry, including providers and suppliers, insurers, educational institutions, pharmaceutical and medical device companies, as well as employers and other constituencies within the healthcare industry at large. We will be releasing further advisories addressing the impact of the legislation on specific practice areas and industries when it becomes final.

Edwards Angell Palmer & Dodge's New York Office Hosts New York Superintendent James J. Wrynn

Fri, 05 Mar 2010 13:15:00 GMT

The Insurance Federation of New York, Inc. is hosting a breakfast with New York Superintendent James J. Wrynn on Friday March, 19, 2010 at 8:15 a.m. at Edwards Angell Palmer & Dodge LLP 's New York office. Superintendent Wrynn will discuss the New York Insurance Exchange (click here to read our most recent blog post about the proposed Insurance Exchange) and other emerging topics.

For more information, including registration information, about the March 19 event, click here.

UK: High Court Ruling Provides Guidance on Interpretation of Limitation and Exclusion Clauses

Fri, 05 Mar 2010 08:45:00 GMT

In Markerstudy Insurance Company Ltd and others v Endsleigh Insurance Services Ltd [2010] EWCH 281 (Comm), Mr Justice Steele was asked to determine as a preliminary issue, amongst other things, the true construction of certain exclusion clauses in a number of claims handling agreements (the Agreements) between the four claimants and Endsleigh. The claimants alleged that Endsleigh had breached the Agreements, and that they had consequently suffered loss in the region of £14 million.

The relevant clauses were as follows:

"Neither party shall be liable to the other for any indirect or consequential loss (including but not limited to loss of goodwill, loss of business, loss of anticipated profits or savings and all other pure economic loss) arising out of or in connection with this Agreement." (Art 13.1) (emphasis added)

"Endsleigh's total liability in contract, tort (including negligence or breach of statutory duty), misrepresentation, restitution or otherwise, arising in connection with the performance or contemplated performance of the Agreement shall be limited to the aggregate amount of fees received pursuant to clause 6.1 above." (Art 13.2) (emphasis added)

"Endsleigh will not be liable to Markerstudy [Planet] for any indirect or consequential loss or loss of profit or loss of business arising out of data input errors by Endsleigh put into Policy Schedules, Certificates of Insurance or Endorsements." (Art 8.1) (emphasis added)

With respect to Art 13.1, the question was whether the specific heads of loss, such as loss of goodwill etc, were freestanding in that they encompassed all losses within that category (direct or indirect), or whether they were examples of the type of losses making up indirect loss. Steele J held that use of the phrase 'including but not limited to' was a strong pointer that the specified heads of loss were just examples of the excluded indirect loss – and did not therefore extend to direct loss. In addition, the clause did not express clearly that the purported exclusion of the specified categories of loss applied to both direct and indirect losses.

With respect to Art 13.2, the issue was whether it included or excluded interest. Steele J held that contractual interest was included within the limitation clause, but statutory interest was of a different character. He stated that statutory interest was not a 'liability in contract', but a discrete statutory liability arising from the exercise of the court's discretion. As such, the inclusion of contractual interest did not automatically lead to the inclusion of statutory interest.

With respect to Art 8.1, Steele J held that the introductory phrase 'any indirect or consequential loss' governed and defined the scope of the specified forms of loss. Therefore, only indirect loss of profit or business was excluded by this clause.

This case is a useful reminder that when using the words 'indirect and consequential loss', clarity is required to ensure that references to other types of loss include both direct and indirect losses falling under the relevant heads of loss.

Chilean Insurers Raise Insured Loss Estimates And Relax Claim Notice Requirements

Fri, 05 Mar 2010 07:44:00 GMT

Having now dispatched personnel to review the damage, and beginning to receive reports from their largest insureds, Chile’s insurers have raised their estimate of insured losses from US$ 2.6 billion to $US 4 billion. Mikel Uriarte, president of the local association of insurers, also conceded that the figure could continue to rise as insurers obtain better information from around the country. Uriarte also noted that only 10% of earthquake premium was retained by local companies, with the remaining 90% ceded to foreign reinsurers.

Chile’s insurance regulator, the Superintendencia de Valores y Seguros (SVS), also announced that the country’s insurers had agreed to relax claim notice requirements under the fire insurance policies that generally provide earthquake cover by endorsement. Insureds will now reportedly have thirty days to report earthquake-related losses under such policies, whereas the mandated notice policy would otherwise have been determined by the individual policy’s particular language. To qualify for such treatment, however, the insured will have to be able to show that it was within the affected areas, searching for family or otherwise impacted by the earthquake in its efforts to effect notice. Under Chilean law, the insurer will then typically have 90 days to respond to the claim, though Fernando Perez, superintendent of the SVS, expressed hope that adjustment of large losses would occur more quickly than that.

If you would like a copy of the SVS release, please e-mail EAPD attorney Machua Millett at mmillett@eapdlaw.com.

If you would be interested in learning more about the Chilean (re)insurance markets and/or regulatory environments, or the evolving situation in Chile following the earthquake, please click the “Email the Editor” button and provide your contact information for follow-up by an EAPD attorney.

U.S. House of Representatives Passes NARAB II

Thu, 04 Mar 2010 15:45:00 GMT

On March 3, 2010, the U.S. House of Representatives passed the National Association of Registered Agents and Brokers Reform Act of 2009 (H.R. 2554 or “NARAB II”) on a voice vote. We previously covered H.R. 2254’s introduction last May here. NARAB II will now head to the Senate for consideration where similar legislation has not yet been voted on.

NARAB II would establish a single set of licensing, continuing education, and other insurance producer qualification standards that would be applied on a multi-state basis, thus creating a national licensing system. States would still be responsible for licensing, supervision of producers, discipline, and for regulating consumer protection, market conduct and unfair trade practices. Many industry groups have voiced support for NARAB II, including the Independent Insurance Agents & Brokers of America (the Big “I”) and the National Association of Mutual Insurance Companies (NAMIC).

We will continue to monitor NARAB II and provide further updates on InsureReinsure.com.

UK: English High Court Finds That Rome II Applies to a Motor Compensation Dispute

Thu, 04 Mar 2010 10:56:00 GMT

The High Court ruled, in Clinton David Jacobs v Motor Insurers' Bureau [2010] EWHC 231 (QB), that under European Union Regulation 864/2007 (Rome II), Spanish law applied in the case of a UK resident seeking compensation for serious injuries sustained in Spain, at the hands of an uninsured driver, then resident in Spain.

The claimant issued proceedings against the defendant, the Motor Insurers' Bureau, in its capacity as a compensatory body under the Motor Vehicles (Compulsory Insurance) (Information Centre and Compensation body) Regulations 2003 (the 2003 Regulations). The defendant is the body responsible for ensuring that UK residents injured by uninsured drivers in other EU member states, are not left without compensation. It compensates those injured abroad, and is in turn reimbursed by its equivalent body in the country of the accident.

By way of a preliminary issue, the parties sought a determination of the basis upon which the defendant was obliged to compensate the claimant, and in particular whether Spanish law, English law or a mixture of the two, should apply to the assessment of that compensation.

The defendant contended that Rome II applied to determine the applicable law and that under Art 4, the applicable law was that of Spain. The claimant argued that, under the 2003 Regulations, the law of England and Wales was applicable, or alternatively that if Rome II did apply then on the proper interpretation of Art 4 the applicable law was that of England and Wales.

Mr Justice Owen held that Rome II did apply to determine the applicable law. He stated that the purpose of this regulation was to establish a uniform approach to situations involving a conflict of laws in the context of non-contractual obligations in civil and commercial matters so that the same law applied irrespective of the jurisdiction in which an action was brought or of the state of residence of the injured party. It was clear that this case involved such a matter.

With respect to the applicable law, Owen J found that to be Spain. Article 4(1) of Rome II states that the applicable law would be that of "the country in which the damage occurs". Owen J found that 'damage' meant the injury and consequential loss and damage suffered at the hands of the uninsured driver and as such must mean Spain. In addition, this case did not fall within the exceptions contained in Arts 4(2) and (3).

This is believed to be the first decision in which the English court has applied Rome II since it came into effect in all EU member states (except Denmark) in January 2009.

UK: Financial Ombudsman Service Publishes Second Set of Complaints Data

Thu, 04 Mar 2010 10:48:00 GMT

The Financial Ombudsman Service (FOS) has recently published its second set of consumer complaints data relating to individual financial businesses (which includes insurance companies, banks and investment firms) for the six-month period from 1 July to 31 December 2009. Please click here to review the complaints data.

FOS announced its intention to publish complaints data in March 2009, and the first set was published in September 2009. Publication of the complaints data is intended to increase transparency in the industry and to encourage firms to:

benchmark their standards of complaints-handling against other firms;
learn from businesses who are handling complaints better; and
reduce the number of unresolved complaints referred to FOS.

The complaints data is presented in two tables which show for the period:

The number of new complaints received by FOS from consumers dissatisfied with a financial business's response to their complaint; and
The percentage of resolved complaints upheld by FOS in favour of the consumer.

During the period, the number of new complaints received by the FOS increased by 18% compared to the first half of 2009.

The Association of British Insurers (ABI) published a short news release in response to the FOS's publication of the data. Please click here to view the news release. The ABI criticised the methodology behind the complaints data and has stated that the data need to be put into context in a way that gives meaningful information to consumers and which allows consumers to make informed choices. Similar criticisms were made by the ABI in September 2009 when the first set of complaints data was published. The ABI says that, currently, the complaints data do not provide enough information to allow consumers to compare the performance of different firms for specific products (such as home insurance) or to take account of the amount of business transacted by each firm.

Brazil: IRB-Brasil Re Achieves Higher Profits Despite Lower Premiums and Reduced Investment Income

Thu, 04 Mar 2010 08:31:00 GMT

Brazil's government-controlled former reinsurance monopoly holder, IRB-Brasil Re, reports that it saw profits rise 2.6% in 2009 despite lower revenue from premiums.

Despite the IRB's premiums falling 8.8% to US$ 1.6 billion last year, and its investment income plummeting 51% to US$ 181 million, its profits reportedly increased to US$ 297 million. The company's market share dropped from close to 100% to around 80% at the end of 2009 as new entrants gained strength at IRB's expense in the first full year since the industry opened to competition in April 2008.

IRB stated that its higher profits are attributable to careful underwriting and increasing use of proportional reinsurance.

If you would be interested in learning more about the Brazilian and/or other Latin American (re)insurance markets and/or regulatory environments, please click the “Email the Editor” button and provide your contact information for follow-up by an EAPD attorney.

UK: Financial Service Authority Wins Appeal Case on Co-Operation With Overseas Regulators

Thu, 04 Mar 2010 08:29:00 GMT

The Financial Services Authority (FSA) went to the Court of Appeal to seek clarification regarding its obligation to co-operate with the Securities and Exchange Commission (SEC), as previously reported here.

In 2006 the SEC instigated proceedings in the US against a number of corporations in relation to fraudulent and manipulative trading. As a result of these proceedings, in 2009 the SEC made a request to the FSA for the production of certain documents and information held within the UK. The FSA appointed investigators under s.169 of the Financial Services and Market Act 2000 (FSMA). The investigators then issued notices to the relevant parties in order to obtain the requested documentation. Judicial Review proceedings were brought against the FSA in August 2009 claiming that the FSA had acted unlawfully in appointing the investigators and the notices from the investigators were "too wide and unspecific" in relation to the US proceedings. The Court held the FSA was within its powers to appoint investigators under FSMA, however the Court said the FSA should have decided that "it was not necessary or indeed proportionate for the wide scope of the discovery".

On 24 February 2010 the Court of Appeal clarified the earlier decision and ruled there had been no error of law or principle in the FSA's decision to co-operate with the SEC's requests for information. The Court held the FSA was not required to second guess a foreign regulator as to the validity of its requests. This decision has provided much needed clarity on the level of co-operation that can be provided between regulators in different jurisdictions.

UK: Third Party (Rights Against Insurers) Bill

Thu, 04 Mar 2010 08:25:00 GMT

As previously reported here, the Third Parties (Rights Against Insurers) Bill was introduced into Parliament in November 2009. It is designed, in particular, to remedy the shortcomings of current legislation in protecting the rights of third party claimants against insurers of the liabilities of insolvent defendants.

The Bill has completed its passage through the House of Lords following its Third Reading on 1 March 2010 and has now moved to the House of Commons for consideration. It was presented to the Commons on 1 March 2010 for its First Reading, at which no debate was held. The Bill has been referred to a Second Reading Committee on 9 March 2010. We will report here on any further developments in the passage of the Bill.

Reminder: The U.S. Reinsurance Under 40s Group at "It's Almost Spring" Happy Hour--this Thursday

Wed, 03 Mar 2010 13:04:00 GMT

As a reminder, please join the U.S. Reinsurance Under 40s Group for its upcoming "It's Almost Spring" Happy Hour this Thursday at 6:00 p.m. Click here for more specific information about the event, and click here to learn more about the U.S. Reinsurance Under 40s Group.

Bermuda: The Bermuda Monetary Authority Proposes Introducing Group-Wide Supervision in Further Move Towards Solvency II Equivalence

Wed, 03 Mar 2010 10:26:00 GMT

The Bermuda Monetary Authority (the BMA) published a consultation paper on 5 February 2010 entitled "Consultation Paper on The Bermuda Monetary Authority's Proposed Insurance Groups Regulatory Framework" (the Paper). The Paper outlines the BMA's proposal for the implementation of a group-wide supervisory regime and outlines the conditions under which the BMA would seek to be considered the Group-Wide Supervisor. The Paper invites the insurance industry and other interested persons to give their views by 5 March 2010 on the proposals set out.

The BMA's group-wide supervisory regime will apply to insurance groups and insurance subgroups that form part of a financial group or mixed conglomerate. It will initially apply to Class 4 and Class 3B insurers because of their higher risk profile but the BMA will be extending the regime to the rest of the commercial insurance sector. The Paper highlights a number of unique factors influencing the nature of the proposed group-wide supervisory regime including:

the jurisdictions within which the group operates;
the complexity of the group structure and the relative significance of the particular insurer within that group;
the management structure of the group, and the extent to which it operates as a single integrated entity or as a group of separate entities; and
the relative solvency position of entities within the group.

The proposed group-wide supervisory regime is risk based and it is proposed by the BMA that it will be fit for purpose to reflect the nature, scale and complexity of the risk to which an insurance group is exposed. In applying the regime, every effort will be made to identify all reasonably foreseeable risks and to analyse the impact they might have on the insurance group.

Of particular interest to (re)insurers not based in Bermuda is that the BMA is reviewing its position on branch operations, both existing and future, within Bermuda as the BMA has recognised that branch operations present a number of supervisory challenges to any group-wide supervisory regime.

Since any group-wide supervisory regime hinges on the perception of cooperation and equivalence, the Paper also seeks to explain the BMA’s proposed equivalence framework, the use of supervisory colleges, and other forms of cooperation to facilitate effective and efficient group-wide supervision. The Paper also describes other features of the BMA’s proposed regulatory framework including the assessment of group corporate governance and risk management, eligible capital for the purposes of satisfying available statutory capital and surplus, and group-wide solvency assessment which includes a discussion of the treatment of intra-group transactions and risk concentrations. Additionally, it explores the efficacy of group support as an important factor in determining group-wide solvency, and the treatment of unregulated entities that are part of the group. The Paper concludes with the BMA’s statutory reporting requirements for groups.

A copy of the paper can be found by clicking here.

UK: Government Announces its Decision on Pleural Plaques

Wed, 03 Mar 2010 10:22:00 GMT

In a statement issued by Justice Secretary Jack Straw, the Government has set out its decision on pleural plaques. As previously reported here, the House of Lords' decision in Johnston v NEI International Combustion [2007] UKHL 39 found that asymptomatic pleural plaque claims were not compensatable under the current laws. Since then, Scotland has introduced the Damages (Asbestos-related Conditions) (Scotland) Act 2009 (previously reported here) which overturned the decision in Scotland. In addition a private member's bill has been making its way through Parliament (previously reported here) in an effort to follow Scotland's lead. As a result, the Government has been under pressure to announce its intentions.

The Government's statement begins by explaining that, due to medical evidence, it is "unable to conclude that the Law Lords' decision should be overturned at this time or that an open-ended no-fault compensation scheme should be set up." Instead, the Government states that a one-off payment of £5000 will be paid to claimants who began a compensation claim for pleural plaques but who had not resolved such a claim by the time of the Law Lords' decision. No other payments will be made in relation to asymptomatic pleural plaques under the proposals.

The remainder of the decision focuses on mesothelioma claims. The Government will establish a working group to consider a variety of issues surrounding mesothelioma claims and establish a National Centre for Asbestos-Related Disease that would "advance medical research into the prevention, cure and alleviation of asbestos-related disease – primarily mesothelioma." It will also increase payments under a workers' compensation statute for mesothelioma victims. Finally, the statement refers to the Government's proposals regarding the tracing of employers' liability insurance and a fund of last resort for those who cannot trace the appropriate employers' liability insurer (previously reported here).

This statement will be met with some controversy by those who were hoping that England and Wales would follow Scotland's lead by overturning the House of Lords' decision. However, the Government's statement will be met with relief by the remainder of the asbestos claimant community as, if implemented, it will ease the burden of claiming compensation for their injuries.

UK: Financial Services Authority (FSA) Sets Out Concerns About Traded Life Policy Investments (TLPIs)

Wed, 03 Mar 2010 10:17:00 GMT

On 24 February 2010, Peter Smith, Head of Investments Policy in the Conduct Policy Division of the FSA, made a speech to the European Life Settlements Association clarifying its approach to TLPIs.

The speech emphasised the risks inherent to those types of products, which it views as complex products suitable only for sophisticated investors. Mr Smith set out a list of some of those risks, which the FSA regarded as real and significant:

longevity risk
volatility of returns
liquidity risk
counterparty risk in relation to the life insurers which issued the policies
tracking of the insured lives.

The speech drew attention to the application of the Treating Customers Fairly outcomes, particularly that the product and services are designed to meet the needs of identified consumer groups and are targetted accordingly. Mr Smith emphasised that it was the responsibility of TLPI providers to ensure that appropriate risk mitigation strategies, including stress testing, were in place from the early stage of design, including due diligence on counterparties, robust tracking controls and realistic maturity models.

The FSA has identified that the compliance regime in firms governing the distribution of TLPI products has the potential to be weak and the speech underlined the responsibility of product providers to highlight the risks in TLPIs to ensure that they were not missold by independent financial advisers (IFAs). In the FSA's view, the financial promotions of some providers of TLPIs to IFAs has fallen below the required standards.

To read the text of the speech, please click here.

Massachusetts Supreme Court Affirms Dismissal of Data Breach Claims Brought Against Retailer by Financial Institutions

Wed, 03 Mar 2010 10:14:00 GMT

Recently, the Supreme Judicial Court of Massachusetts upheld two lower court decisions dismissing, on separate motions to dismiss and for summary judgment, a number of claims brought by credit unions against a retailer in connection with a breach of debit and credit card data. Cumis Ins. Society, Inc. v. BJ’s Wholesale Club, Inc., 918 N.E.2d 36 (Mass. 2009).

In Cumis, unauthorized parties gained access to data from millions of debit and credit cards used to purchase merchandise from a retailer, and used those cards to engage in fraudulent transactions. Credit unions that had issued the cards sued the retailer and its acquiring bank (the bank that processed the card transactions) for breach of contract as third party beneficiaries, negligence, fraud, and negligent misrepresentation. The trial court granted dismissal of the breach of contract and negligence claims. Following discovery, the trial court dismissed the remaining claims on summary judgment, and the credit unions appealed.

The Supreme Judicial Court of Massachusetts upheld the lower court’s decision on summary judgment. First it addressed the breach of contract claims, which were based on the argument that the credit unions were intended third-party beneficiaries of a contract between the retailer and the acquiring bank which required the defendants to refrain from storing debit and credit card data. Noting that the contract in question, by its express terms, forbids third-party enforcement, the court upheld the dismissal.

Next the court upheld the dismissal of the negligence claims, explaining that the economic loss doctrine, as applied in Massachusetts, prohibits tort recovery in the absence of physical harm or property damage.

Finally, the court upheld the dismissal on summary judgment of the fraud and negligent misrepresentation claims. Both claims were predicated on the allegation that in accepting credit cards for transactions the defendants were representing that they were in compliance with regulations established by the card brands (Visa and MasterCard), and that the credit unions relied on those representations. The court decided that the plaintiffs could not show that such alleged reliance had been justifiable.

To obtain a copy of the Cumis decision, please click here and enter “12/11/2009” as the release date.